FBN Excluded as Fitch Upgrades Five Banks Outlook to Positive
Fitch Ratings has revised its outlook on the long-term issuer default ratings (IDRs) or creditworthiness of five Nigerian banks and one bank holding company to positive from stable, according to its rating note which excluded FBN Holdings or First Bank Limited from the upgrade.
The global ratings firm report obtained stated that the long-term creditworthiness of these banks has been affirmed at ‘B-‘, which is a highly speculative credit quality with material default risks and a limited margin of safety.
According to the rating note, the affected issuers include Access Bank Plc, Zenith Bank Plc, and United Bank for Africa Plc (UBA), Guaranty Trust Bank Limited (GTB), Guaranty Trust Holding Company Plc (GTCO), and Bank of Industry Limited (BOI).
FBN Holdings was, however, excluded from the list. Fitch said the revision of the outlooks on the credit ratings of Access Bank, Zenith Bank, UBA, GTB, and GTCO mirrors the recent sovereign outlook revision.
The global ratings agency said this reflects view that Nigeria’s Long-Term IDRs are likely to represent less of a constraint on the issuers’ standalone creditworthiness in the near term.
“The revision of the Outlook on BOI’s Long-Term IDR reflects our view that the government’s ability to provide support to the policy bank is likely to improve”, Fitch said in the rating note.
Recall that Fitch Ratings revised the outlook on Nigeria’s creditworthiness to positive early in May, 2023. It said the revision partly reflected government reforms over the last year to support the restoration of macroeconomic stability and enhance policy coherence and credibility.
The exchange rate and monetary policy frameworks have been adjusted, fuel subsidies reduced, coordination between the ministry of finance and the Central Bank of Nigeria (CBN) improved, central bank financing of the government scaled back,, and administrative efficiency measures are being taken to raise the currently low government revenue, as well as oil production.
Meanwhile, the latest assessment indicated that the issuers’ national ratings were unaffected by the event. As a policy bank, BOI’s Government Support Rating (GSR) has been affirmed at ‘b-‘. The GSRs of the other issuers are unaffected.
Fitch said the credit ratings of Access Bank, Zenith Bank, UBA, GTB, and GTCO are driven by their standalone creditworthiness, as expressed by their viability ratings (VR) of ‘b-‘. The VRs are constrained by Nigeria’s long-term IDRs due to high sovereign exposure in the form of fixed-income securities, cash reserves, and FX swaps with the CBN relative to capital.
The viability ratings, according to Fitch, also capture the issuers’ strong business profiles, characterised by sizeable market shares and revenue diversification, in addition to strong profitability, and large capital and foreign-currency (FC) liquidity buffers.
The global ratings agency said the positive outlooks on the long-term IDRs mirror those on the sovereign. “The viability ratings of Zenith Bank, UBA,GTB,B and GTCO remain one notch below their implied VRs of ‘b’, reflecting the operating environment/sovereign rating constraint”, Fitch said in the update.
It noted that operating conditions remain challenging despite the sovereign outlook revision, with implemented reforms presenting significant near-term credit and market risks to the banking sector.
The Nigerian naira has devalued by over 65% against the US dollar since end-May 2023, exerting pressure on the banking sector’s capitalisation and heightening credit concentration risks, and the FX market has yet to stabilise.
Inflation has accelerated to 33.20% in March, partly due to exchange rate pass-through and rising food prices, and is forecast to remain high in the near term. Fitch projected 26.3% inflation rate for 2024.
“The banking sector’s ability to tolerate these risks will be supported by a marked increase in equity issuance over the next two years to comply with a significant increase in paid-in capital requirements by the end of first quarter of 2026”, the rating note stated.
The CBN has stepped up efforts to reform the monetary and exchange rate framework, including by increasing the monetary policy rate by a 600 basis points in February and March, and the large differential between the official and parallel market exchange rate has collapsed.
Average daily FX turnover at the official FX window has risen sharply from 2H23, albeit there has been renewed volatility, and the CBN has cleared USD4.5 billion of the backlog of unpaid FX forwards, which is positive for the banking sector’s foreign currency liquidity.
However, USD2.2 billion of “unverified” FX forwards have yet to be cleared and there are risks of the CBN introducing more regulations that are detrimental to the banking sector to support macroeconomic stability. Nigeria Eurobond Slumps after CBN Resumes OMO Auction
Fitch believes that the five issuers can comfortably tolerate the credit, market and regulatory risks emanating from the challenged operating environment due to their strong pre-impairment operating profits, which provide significant headroom to absorb loan impairment charges, and their large capital and FC liquidity buffers.
The rating note added that BOI’s long-term IDR is driven by its GSR of ‘b-‘, which reflects potential support from the Nigerian government, if required. Fitch considers the government has a high propensity to support BOI given its 99.9% state ownership, well-established and clearly defined policy role, and significant share of government-guaranteed funding.
However, the government’s ability to provide support is limited by its own creditworthiness, as indicated by its Long-Term IDR of ‘B-‘. The Positive Outlook on BOI’s Long-Term IDR mirrors that on the sovereign. #FBN Excluded as Fitch Upgrades Five Banks Outlook to Positive IMF Supports Zambia Economic Reform with $1.3bn – Official
