Moody’s Affirms Ecobank B3 Rating, Upgrades Outlook to Stable

Moody’s Affirms Ecobank B3 Rating, Upgrades Outlook to Stable

Moody’s Investors Service has affirmed the B3 long-term issuer ratings and B3 senior unsecured bond rating of Ecobank Transnational Incorporated (ETI).  At the same time, Moody’s changed the outlook to stable from negative on the group’s long-term ratings.

According to the rating note, Moody’s decision to change the outlook to stable from negative reflects the bank’s resilient credit profile through the challenging operating conditions amid the pandemic and expectation of steadier operating conditions in 2022, as some of the economies where the bank operates will stabilise.

The affirmation of ETI’s notional Baseline Credit Assessment (BCA) takes into consideration the ongoing improvement in ETI’s asset quality, capitalisation and liquidity.

As a counterbalance to the aforementioned improvement, the rating affirmation also takes into account the still weak capitalisation, as well as the asset quality and profitability challenges at the Nigerian operations.

It said the improvement in asset quality reflects a combination of factors including recoveries, collections, write-offs, and upgrades that together outweighed the problem loan formation -thereby reducing the total stock of problem loans.

More generally the bank benefited from the gradual improvement in the firm’s risk management over the last five years, Moody’s said.

The rating firm said the ongoing clean-up of the loan book at Ecobank Nigeria, and the gradual decline in the relative importance of Nigerian operations over recent years also contributed to the improvement.

ETI’s problem loans declined to 7.4% of gross loans as of June 2021 from 7.6% in December 2020 and 9.7% in 2019 while loan loss reserves increased to 87% of problem loans as of June 2021 from 75% as of end-2020 and 58% as of end-2019.

In terms of capitalisation, ETI posted an improvement in capitalisation between December 2019 and June 2021.

Although the group’s core capital buffers remain limited, the gradual improvement reflects internal capital generation and the lower negative impact of foreign currency translation over the last two years.

ETI’s limited core capital buffers result from the combination of modest profitability over recent years and a large foreign currency translation reserve (owing to continuous depreciation in the local currencies of some of the countries in which ETI operate) along with Moody’s adjustments for minority interests and risk weighting of government securities.

The group’s tangible common equity to risk-weighted assets ratio (TCE ratio) increased to 8.4% in June 2021 from 6.7% at end-2020 and 6.4% at end-2019, while its reported Tier 1 ratio increased to 9.9% in June 2021 from 9.4% at end-2020 and 8.8% at end-2019.

Moody’s estimates that ETI’s recent $75 million AT1 issuances further increased the firm’s Pro-forma Tier 1 ratio to around 10.4% when using June 2021 as a base.

The aforementioned TCE ratio incorporates an adjustment for minority interests but does not incorporate a further and private adjustment that Moody’s performs to risk weight the government securities holdings.

The affirmation of the rating also takes into account the upgrade in ETI’s weighted Macro Profile from “Very Weak+” to “Weak-“, following the upgrade in the Macro Profile of Cote d’Ivoire from “Weak-” to “Weak”.

The upgrade in the Macro Profile of Cote d’Ivoire reflects the country’s robust growth prospects, improving governance and moderate susceptibility to event risk.

Cote d’Ivoire’s “Weak” Macro Profile also captures challenges such as credit concentrations and high problem loans, moderated by a sound regulatory framework in the West African Economic and Monetary Union (WAEMU).

“We expect a robust economic recovery in the WAEMU region (5.4% real GDP growth in 2022) supported by structural reforms and high investment; subdued economic growth in Nigeria (3.0% real GDP growth in 2022) owing to limited fiscal space and institutional capacity; as well as strong growth in Ghana (6.2% real GDP growth in 2022) reflecting strong cocoa season and recovery in mining and services”.

Moody’s said the rating also captures the benefits from ETI’s geographical diversification, which the global rating firm reflects through a full one-notch positive qualitative adjustment in the scorecard.

ETI has a unique footprint across Africa, with banking subsidiaries in 35 African countries and a market-leading or top-3 bank position in 16 countries. However, Moody’s also notes that, while ETI’s geographical diversification is meaningful, the group’s diversification in terms of business lines remains limited.

In addition, the earnings stability and resilience to the stress of the various parts of the group has historically been uneven, which noticeably constrains the diversification benefits. # Moody’s Affirms Ecobank B3 Rating, Upgrades Outlook to Stable

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