Fitch Ratings has announced that Nigerian banks have reasonable loss absorption buffers, underpinned by strengthened capitalisation since the last crisis.
It also stated that the near term healthy earnings of the banks will continue to absorb larger credit losses but future profits will be under pressure from slowing loan growth, reduced client activity and higher levels of provisioning for expected credit losses under the IFRS nine accounting framework.
In its latest ratings report released on Friday, the global credit rating agency downgraded the three-highest rated banks in Nigeria, Zenith Bank, Guaranty Trust Bank (GTB) and United Bank for Africa (UBA), to Long-Term Issuer Default Rating (IDR) ‘B’ and Viability Rating (VR) ‘b’.
Fitch also placed the Long-Term IDRs, VRs and National Ratings of all 10 rated Nigerian banks (excluding Stanbic IBTC Holdings (SIBTCH) and Stanbic IBTC Bank (SIBTC) – which are not assigned VRs and IDRs) on Rating Watch Negative (RWN).
According to the agency, the RWN reflects expectations that all Nigerian banks will face material pressures from a weaker operating environment over the next few months given the oil price crash, potential further devaluation of the Nigerian naira and the impact of the COVID-19 pandemic on individuals and businesses.
While the full extent is not yet known, Fitch says that ‘b+’ VRs and ‘B+’ IDRs are no longer compatible with the deteriorated operating environment.
Even before the current crisis, Fitch’s sector outlook for the Nigerian banking sector was negative, which reflected tough operating conditions, including slow Bros Domestic Product (GDP) growth, rising regulatory risks and potential performance pressures.
Fitch expects banks’ credit profiles to suffer from weaker asset quality and reduced profitability in the more severe downside scenario.
It noted that based on experiences from 2015/2016, it is expected that the current oil price shock will adversely impact the oil and gas sector, which accounts for around 30 per cent of the banking sector’ gross loans, of which a large proportion was restructured during the previous crisis (some are still classified as stage 2 under IFRS 9).
“Our stress tests show that asset-quality risks arising from deterioration of the banks’ oil and gas exposures are the biggest threat to their ratings.
“Additionally, we expect the non-oil segment to be impacted by the slower economy, but also due to the COVID-19 crisis, which could severely affect communities and industries. It would particularly test the quality of consumer and SME loans.”
Lower oil revenues also raise the prospect of a material naira devaluation, which would put pressure on the banks’ regulatory capital ratios, the agency stated.
However, given the banks’ net long foreign-currency positions, Fitch’s stress tests show that in most cases the impact on Fitch Core Capital (FCC) ratios is tolerable under several scenarios.
On balance, it says the near-term impact from the oil price shock and COVID-19 on funding and liquidity is likely to be tolerable, adding that the primary risk is that lower oil revenues (and Nigeria’s falling FX reserves) could limit banks’ access to foreign currency (FC) liquidity.
Furthermore, adverse global conditions could impede some banks in raising external financing. Local-currency liquidity remains strong with banks funded mainly by low-cost customer deposits the agency stated.
Asset-quality metrics, which have improved over the last three years owing to restructuring, recoveries and write-offs, are likely to deteriorate in 2020 due to the current shocks. This will also put increasing pressure on earnings, profitability and capitalisation. The risks to funding and liquidity are mainly from disruption in foreign currency liquidity.
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s (B+/Negative) weak ability to provide support, particularly in FC. Therefore, the Support Rating Floor (SRF) of all Nigerian banks is ‘No Floor’ and all Support Ratings (SRs) are ‘5’.
“This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable,” it said.
Following the publication of Fitch’s new Bank Rating Criteria on 28 February 2020, the agency has also downgraded Access Bank’s N30 billion subordinated bonds to ‘A-(nga)’ from ‘A(nga)’, two notches below the bank’s National Long-Term Rating.
This according to the agency reflects the revised baseline notching for loss severity for this type of debt to two notches from one. Fitch has placed Access’ subordinated bonds on RWN, mirroring that on the bank’s Long-Term National Rating.
Nigerian banks’ ratings could remain at their current levels if Fitch believes the operating environment is still supportive of the current ratings, and in particular if asset quality holds up.
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