Asset Quality: Jaiz Bank Credit-Impaired Loans Improve –Fitch
Fitch Ratings has affirmed Jaiz Bank PLC’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ and it viability rating (VR) at ‘b-‘. The rating upgrade followed the non-interest bank improved asset quality supported by recovery, though decline, its credit-impaired loans remain high for the lender’s balance sheet size.
In the rating note, Fitch said it also affirmed the bank’s National Long-Term Rating at ‘BBB+ (nga)’. According to the global rating agency, the Outlooks on the Long-Term IDR and National Long-Term Rating are Stable.
Fitch said Jaiz Bank’s IDRs are driven by its standalone creditworthiness, as expressed by its ‘b-‘ viability rating.
It added that Jaiz Bank viability rating reflects the concentration of the bank’s operations in Nigeria’s challenging operating environment, a small franchise, weak revenue diversification and asset-quality pressures.
Jaiz Bank’s National Long-Term Rating is at the lower end of National Ratings assigned to Nigerian banks for the same reasons and despite stronger profitability and a more stable funding profile than peers’, Fitch said.
Jaiz Bank remains Nigeria’s first fully fledged non-interest Islamic banking institution.
According to the rating, the bank has a leading Islamic finance franchise in Nigeria, representing 43% of non-interest bank sector assets at the end of 2023.
At 0.5% in financial year 2023, Fitch noted that Jaiz Bank market share of domestic banking system assets remains small.
Fitch considered Jaiz Bank’s single-borrower credit concentration to high, with the 20 largest customer exposures representing 42% of gross financing assets at the end of first quarter of 2024.
The rating note explained that the Islamic bank lending to the higher-risk agriculture and related industries is high.
Also, it exposure to through Federal Government of Nigeria sukuk and the Central Bank of Nigeria (CBN) cash reserves is very high, according to Fitch.
The bank has been battling with asset quality pressure. A fund injection from its majority shareholders boosted capital position.
But tough time has persisted amidst recapitalisation. The Central Bank of Nigeria (CBN) expects Jaiz Bank to increase its capital based to N20 billion, excluding retain earnings in less than two years.
In its rating note, Fitch said Jaiz Bank’s Stage 3 ratio decreased to 8.9% in 2023 from 9.7% in 2022 as a result of recoveries and financing growth but remains high.
Jaiz Bank has aggressively grown its financing assets by an average 34% over the past four years, which creates seasoning risks to asset quality, the rating agency said.
Fitch explained that the bank’s specific provisioning coverage of impaired financing assets was 37% at the end of 2023, reflecting reliance on collateral.
However, the global ratings agency said the bank’s operating return was a healthy 6.3% of risk-weighted assets (RWAs) in 2023.
Its healthy profitability is underpinned by a wide net interest margin (NIM), which reflects the highest asset yield in the banking system and particularly low funding costs. For Jaiz Bank, revenue diversification is limited by the Islamic-banking business model.
Jaiz Bank’s Fitch Core Capital ratio of 18.5% at end-1Q24 was supported by a low RWA density (29%) that benefits from an Islamic bank-specific discount of 50%.
Analysts said Jaiz bank’s strong pre-impairment operating profit provides a sizeable buffer to absorb impairment charges without affecting capital.
The non-interest lender also operated with limited balance -sheet dollarisation, which makes Jaiz Bank’s capitalisation less sensitive to the direct effects of the recent naira devaluation than peers.
Jaiz bank’s funding profile is noted to be dominated by a high percentage of current and savings accounts and particularly high deposits from individuals, supporting funding stability and low funding costs.
Fitch also said its depositor concentration is moderate, with the 20 largest depositors representing 12% of total customer deposits at end-1Q24. GTCO, Zenith, UBA Drive Intraday Gain on NGX
