Fitch Takes Rating Action on 12 Nigerian Banks
Fitch Ratings has taken rating actions on 12 Nigerian deposit money banks following the devaluation of the naira, according to its official release obtained by MarketForces Africa. According to the global rating agency, the naira depreciation has impacted deposit money banks’ capital positions, individually, and the firm expects the industry’s non-performing loans to rise.
The Nigerian naira dropped sharply in Januarya as exchnage rate hit N1,516 per US dollar as of Feb 12, 2024, translating to about 40% devaluation. This exceeded Fitch Ratings’ expectations of a more moderate depreciation in 2024. The large devaluation is the second within a year, meaning that naira has lost 70% of its value since 2022 and has converged the official exchange rate with the parallel market rate.
In its update released yesterday, Fitch Ratings maintained rating watch negative on First City Monument Bank’s (FCMB) and Union Bank of Nigeria PLC’s (UBN) creditworthiness. It also set Ecobank Nigeria Limited’s credit rating to ‘CCC+’ from ‘B-‘ and removed the Nigerian lender from rating watch.
According to its latest update, Fitch simultaneously affirmed eight other Nigerian banks’ and two bank holdings companies’ credit ratings 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) and Guaranty Trust Bank Limited (GTB). Others are Fidelity Bank PLC, Wema Bank PLC and Jaiz Bank PLC. The National Long-Term Ratings of Stanbic IBTC Holdings PLC and Stanbic IBTC Bank PLC have also been affirmed at ‘AAA (nga)’ with a stable outlook.
KEY RATING DRIVERS
The Nigerian naira was recently devalued sharply in January, FX rate was 1,516 per US dollar as of Feb 12, 2024, translating to about 40% devaluation. This exceeded Fitch Ratings’ expectations of a more moderate depreciation in 2024.
The large devaluation is the second within a year, meaning that naira has lost 70% of its value since 2022 and has converged the official exchange rate with the parallel market rate.
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, it 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 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 caused already material FC-denominated problem loans (Stage 2 and Stage 3 loans; predominantly oil and gas sector loans) to have inflated relative to gross loans and core capital and accentuated credit concentration risks.
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.
The Central Bank of Nigeria (CBN) has published new circulars and made many statements accompanying the recent devaluation. One circular issued after the devaluation on 31 January, aimed at increasing the supply of FC, prohibited banks from having net long FC positions and set 1 February as the deadline for compliance.
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.
The Governor of the CBN, Yemi Cardoso, also announced plans to establish a foreign currency gateway bank with the intention of centralising correspondent banking activities, while asserting that a recent audit has determined USD2.4 billion of overdue FX forwards invalid.
Fitch believes these measures by the CBN may negatively affect the banking sector’s foreign currency liquidity.
The downgrade of ecobank credit rating follows the downgrade of the its viability rating to ‘ccc+’ from ‘b-‘, which has been removed from RWN, and reflects Fitch’s estimate that the bank has breached its regulatory minimum capital adequacy ratio requirement of 10%.
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.
This is in view of the pressure on the naira, increased asset-quality risks given material largely foreign currency denominated Stage 2 and Stage 3 loans combined 38%of gross loans at the end of the third quarter of 2023 and heightened credit concentration risks.
The downgrade also reflects foreign currency liquidity risks that may stem from any capital adequacy ration breach, including due to the accelerated repayment of its USD300 million Eurobond as a result of breach of covenant.
Ecobank issuer default rating and National Ratings are now driven by its viability rating and underpinned by potential support from its ultimate parent, Togo-based Ecobank Transnational Incorporated as expressed by its SSR of ‘ccc+’, the report stated.
Fitch explained that Stanbic IBTC holdings National Ratings are driven by potential support from their ultimate parent, South Africa-based Standard Bank Group Limited. The IDRs and National Ratings of the 10 other banks and two BHCs are driven by their standalone creditworthiness, as expressed by their viability ratingss.
The report explained that rating watch negative on FCMB and UBN reflects Fitch Ratings view that, while estimated to have remained compliant with their CAR requirements; following the devaluation, the banks are at risk of breaching the requirement.
This is due to further capital pressure emanating from further naira depreciation and credit losses considering already high Stage 2 and Stage 3 loans (end-3Q23: 31% of gross loans for FCMB; currently estimated at over 40% for UBN).
The RWN on UBN’s Long-Term IDR also continues to reflect uncertainty surrounding the background to the recent intervention by the the potential for further regulatory actions that may contribute to a CAR breach and the negative implications for the bank’s standalone credit profile, particularly relating to corporate governance risks and liquidity pressures arising from potential funding instability.
Fitch expects to resolve the RWNs in the next six months when prospects for CAR compliance and, in the case of UBN, the implications of the CBN intervention are clear. Meyer Plc Records 61% Increase in Market Value
The affirmation of the other Nigerian banks’ and BHCs’ Long-Term IDRs and National Ratings reflects Fitch’s view that these issuers are likely to remain compliant with their respective regulatory minimum CAR requirements despite the devaluation, with sufficient buffers and pre-impairment operating profits to tolerate a further moderate naira depreciation and the second-order effects of a challenging economic environment on loan quality. Fitch Keeps FCMB on Rating Watch Over Capital, Asset Quality Pressures
The VRs of Zenith Bank, UBA, GTCO and GTB are one notch below their implied VRs of ‘b’, reflecting the operating environment/sovereign rating constraint. ENG’s VR is one notch below its implied VR of ‘b-‘ due to the following adjustment: Weakest Link – capitalisation and leverage. #Fitch Takes Rating Action on 12 Nigerian Banks
