GCR Affirms Development Bank of Nigeria’s Top Ratings
An emerging market ratings firm, GCR Ratings, has affirmed Development Bank of Nigeria Plc.’s national scale long and short-term issuer ratings of AAA (NG)/A1+ (NG), with a stable outlook.
The emerging market ratings firm said at the same time, it withdrew the international scale long-term Issuer credit rating.
According to the rating note, the stable outlook reflects GCR’s expectations of a sustained trajectory of the Group’s business profile and financial performance over the next 12-18 months.
It noted that DBN capitalisation metrics are expected to remain strong on account of its good earnings from a growing and conservative on-lending portfolio supported by strict underwriting criteria.
Development Bank of Nigeria Plc, a core operating entity within a wider group comprising the Bank and its wholly owned subsidiary, Impact Credit Guarantee Limited (ICGL). As such, it stated that the national scale issuer credit ratings on the Bank reflect the strengths and weaknesses of the Group.
The ratings affirmation of the Bank reflects the Group’s strong capitalisation metrics, stable funding structure and strong liquidity, good risk profile and a competitive position that shows considerable progress in the delivery of its mandate to targeted Micro, Small and Medium Enterprises (MSMEs), it said.
GCR said in the rating note that DBN has a mandate to bridge the gap created by the inability of existing lending institutions to meet the funding needs of MSMEs in Nigeria by providing access to longer tenured financing using participating financial institutions (PFI) as conduits.
Furthermore, the Group incentivises PFIs, predominantly deposit-money and microfinance banks, to lend to MSMEs, offering technical assistance to augment their capacity where necessary.
DBN through its subsidiary, ICGL which was incorporated on 8 March 2019, issues partial credit guarantees (up to 60%) to PFIs in respect of loans granted to eligible MSMEs.
GCR said its assessment of DBN’s competitive position reflects a good delivery of its mandate, evidenced by a loan book size of NGN372 billion as of 31 December 2022.
This accounts for about a third of total loans to MSMEs by deposit money banks and an increasing number of registered PFIs, which registered at 60 in 2022 (with disbursements to 27) from 51 in the previous year.
In addition, it said ICGL has guaranteed 27,208 loans since inception totalling NGN69.4 billion. However, these positives are counterbalanced by the weak operating environment and a restriction on the number of PFIs that can access its funding facilities because of its strict minimum eligible criteria, GCR added.
According to the rating note, the assessment of the Group’s capital and leverage is in the highest category based on the GCR core capital ratio and a leverage ratio of 50.6% (2021: 51.3%) and 37.9% (2021: 35.7%) respectively in 2022, supported by strong earnings generation and retention.
As of 31 December 2022, shareholders’ equity of NGN214 billion was more than double the regulatory minimum of NGN100 billion for development finance institutions in Nigeria.
Over the next 12-18 months, GCR said it expects the Group to maintain its core capital ratio within the highest assessment of 35% even with the projected 15% growth in the loan book and dividends upstreaming – which commenced in 2022, the first after five years of operations.
While the leverage ratio is also expected to remain in the highest category, GCR stated that it recognises the growth in ICGL’s contingent liabilities.
ICGL contingent liabilities which printed at NGN29.2 billion in 2022 came higher than NGN26.9 billion reported in 2021 – reflecting its guaranteed coverage on all active loans with PFIs and represented 13.6% of total shareholders’ equity in 2022.
The rating note said a considerable increase in the guaranteed portfolio as a percentage of capital could reflect negatively on the capital and leverage assessment.
“DBN’s risk assessment is positive to the rating. DBN is exposed to credit risk through its lending activities to PFIs although the credit risk of the underlying loans is borne by the PFIs”.
In the rating report, GCR notes obligor concentration as the Bank’s top five PFIs accounted for 86% of the loan book as of 31 December 2022.
It said some credit risks also exist within the subsidiary- ICGL which partially guarantees loans given to MSMEs by PFIs up to 60%.
Notwithstanding, the Bank has maintained nil NPLs since inception and the ratio of called guarantees to a cumulative guarantee issued from ICGL remains negligible at 0.49% in 2022 versus 0.02% in 2021.
Furthermore, the rating firm said the Group’s credit loss ratio of 0.4% in 2022 compared to a write-back in the previous year, largely reflects the challenging macroeconomic conditions which adversely impacted the ratings of a few PFIs.
Supporting the Group’s good risk position is its strict minimum eligibility criteria for PFIs and the collaterisation of all its exposures to PFIs at a minimum of 100%, using treasury bills and bonds, direct debit mandates on the PFI’s account with CBN and correspondent banks as well as moveable assets registered with the National Credit Registry. Market and operational risks remain minimal. The Group’s risk profile is expected to remain good over the outlook horizon.
Funding and liquidity is positive to the rating, supported by access to long-term concessionary funding from international development financial institutions through the Federal Government of Nigeria (FGN).
Nonetheless, we note refinancing risks that exist as the maturity dates approach, except the funds are refinanced well in advance.
Over the next 12-18 months, the Group intends to diversify its funding structure by raising debt capital from the Nigerian debt capital market following the registration of a NGN100 billion programme in April 2022.
The proposed Series 1 senior unsecured bond shall offer up to NGN20 billion to support its growing mandate. DBN continues to maintain a good liquidity profile with about 28% of total assets in liquid FGN bonds and interbank deposits as of 31 December 2022.
“We expect the Group’s funding and liquidity assessment to remain stable going forward”, the ratings said in the report posted on its website.
“The risks in the Group’s guaranteed portfolio are also expected to remain well contained over the next 12-18 months.
“In addition, we expect the proposed bond issue and funding from other international development finance institutions to translate to a more diversified and stable funding base with the good liquidity profile maintained”, GCR said in its rating note.
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