Naira Devaluation: Fitch takes rating action on 12 Nigerian Banks

Following a sharp devaluation of the Nigerian naira by about 40 per cent, exceeding its expectations of a more moderate depreciation in 2024, Fitch Ratings has taken rating action on 12 Nigerian banks.

According to the rating agency, the large devaluation creates short-term macroeconomic risks, such as accentuating already-high inflation (December 2023: 29% yoy) that may weigh on economic growth, heightening loan quality, and increasing capital pressures already facing the banking sector.

Fitch now expects the banking sector’s impaired loans (Stage 3 loans) ratio to increase at a faster pace than before the devaluation, which itself has already caused material Foreign Currency (FC)-denominated problem loans.

The concerned loans are Stage 2 and Stage 3 loans (primarily oil and gas sector loans), which have inflated relative to gross loans and core capital and accentuated credit concentration risks.

Specifically, Fitch maintained the Rating Watch Negative (RWN) on First City Monument Bank’s (FCMB) and Union Bank of Nigeria PLC’s (UBN) long-term IDRs of ‘B-‘ and national long-term ratings of ‘BBB+(nga)’ and ‘BBB(nga)’, respectively.

It simultaneously affirmed eight other Nigerian banks’ and two bank holding companies’ (BHCs) long-term IDRs at ‘B-‘, while also affirming the issuers’ national long-term ratings with stable outlooks. These entities are Access Bank Plc, Zenith Bank Plc, FBN Holdings Plc, First Bank of Nigeria Ltd, United Bank for Africa Plc (UBA), Guaranty Trust Holding Company Plc (GTCO), Guaranty Trust Bank Limited (GTB), Fidelity Bank PLC, Wema Bank PLC, and Jaiz Bank PLC. The National Long-Term Ratings of Stanbic IBTC Holdings PLC (SIBTCH) and Stanbic IBTC Bank PLC (SIBTC) have also been affirmed at ‘AAA(nga)’ with a stable outlook.

Fitch Ratings has also downgraded Ecobank Nigeria Limited’s (ENG) Long-Term Issuer Default Rating (IDR) to ‘CCC+’ from ‘B-‘ and removed it from Rating Watch Negative (RWN) following the recent devaluation of the Nigerian naira. The agency has also downgraded the bank’s National Long-Term Rating to ‘BB+(nga)’ from ‘BBB(nga)’. The outlook on the long-term IDR and national long-term rating is stable.

ENG’s Shareholder Support Rating (SSR) and the other issuers’ Government Support Ratings are unaffected by the event.

The downgrade of ENG’s Long-Term IDR follows the downgrade of the bank’s VR to ‘ccc+’ from ‘b-‘, which has been removed from RWN, and reflects Fitch’s estimate that the bank has breached its regulatory minimum CAR requirement of 10 per cent.

“It also reflects our view that, notwithstanding likely material forbearance in respect of single-obligor credit concentration, the bank’s internal capital generation is likely to be insufficient to restore compliance with the regulatory minimum and core capital buffers commensurate with its risk profile in the near term, “ Fitch further stated.

This is in view of the pressure on the naira, increased asset-quality risks given material largely FC-denominated Stage 2 and Stage 3 loans (end-3Q23: a combined 38 per cent of gross loans), and heightened credit concentration risks.

The Nigerian naira was recently devalued sharply (end-2023: 899/US$; 13 February: 1,516/US$; about 40 per cent devaluation), “exceeding our expectations of a more moderate depreciation in 2024. The large devaluation is the second within a year (70% devaluation since end-2022) and has converged the official exchange rate with the parallel market rate, “ it stated.

However, Fitch observed that the continued move away from a longstanding managed exchange rate regime is conducive to restoring capital inflows and reducing foreign-currency (FC) shortages that have weighed on economic activity in recent years.

However, asset-quality risks are mitigated by the small size of banks’ loan books (end-3Q23: net loans represented 35% of domestic banking sector assets; non-loan assets mainly being sovereign exposure) and most FC loans having been extended to borrowers with FC receivables. Furthermore, pre-impairment operating profit, which we expect to benefit from rising interest rates, generally provides a sufficient buffer to absorb loan impairment charges without affecting capital, as stated in a report on Friday.

The Central Bank of Nigeria (CBN) has published new circulars and made a number of statements accompanying the recent devaluation. One circular issued after the devaluation on January 31, aimed at increasing the supply of FC, prohibited banks from having net-long FC positions and set February 1 as the deadline for compliance.

Fitch noted that net-long FC positions have mitigated the impact of past devaluations, including the recent devaluation, on capital ratios as they result in foreign-exchange revaluation gains that cushion the impact of inflated FC-denominated risk-weighted assets (RWAs).

Without net-long FC positions, banks’ capital positions are now more exposed to Fitch’s expectation of a further moderate depreciation of the naira, but total capital adequacy ratios (CAR), in most cases, will remain above regulatory minimum requirements.

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