Fitch Affirms Sterling Bank at 'B-'; Withdraws Ratings
Sterling Bank

Fitch Affirms Sterling Bank at ‘B-‘; Withdraws Ratings

Fitch Ratings has affirmed Sterling Bank Plc.’s ratings, including the lender’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook and viability rating (VR) at ‘b-‘. However, the global rating agency has withdrawn from covering the bank, citing commercial reasons.

According to the rating note, Sterling’s IDRs are driven by its standalone creditworthiness, as expressed by its VR of ‘b-‘, which reflects the bank’s sensitivity to Nigeria’s challenging operating environment, a fairly small franchise, high credit concentrations and weaknesses in the bank’s foreign-currency (FC) funding profile.

These are balanced by healthy asset quality metrics and reasonable capitalisation although both are highly sensitive to sovereign risks, according to the rating note.

Nigerian operating environment has weakened in 2022, Fitch said while projecting higher inflation, which reached a 17-year high of 20.8% in October 2022, rising interest rates and acute US dollar shortages stemming from declining foreign-exchange (FX) earnings and reduced capital inflows to create more challenging operating conditions for banks over the next 12-18 months.

Shortages in the official FX market have caused the naira to depreciate sharply on the parallel market to about N770 per dollar on 24 November, therefore trading at a large discount to the official rate of NGN443/USD, raising the possibility of a material devaluation of the official rate.

Sterling operates exclusively in Nigeria under a national banking licence and has fairly small market shares, representing 2.6% of banking system assets at the end of the financial year 2021 while its loans are concentrated in a few hands.

Fitch stated that the bank’s single-borrower concentration is high, with the 20 largest customer exposures representing 50% of gross loans and 262% of Fitch’s core capital (FCC) in 2021.

It said oil and gas exposure has reduced in recent years but remains high, representing 24% of gross loans and 124% of FCC in 2021.

Sterling’s total exposure to the Nigerian sovereign through holdings of Nigerian sovereign securities and cash reserves at the Central Bank of Nigeria (CBN) was 467% of the bank’s FCC at the end of 9m-2022, though asset quality has improved.

At the end of the first quarter of 2022, impaired loans ratio declined to 0.7% from 1.9% at the end of 2020, owing to write-offs and robust loan growth in 2021 and remains among the lowest across the banking sector.

The ratio increased to 1.3% at the end of the first half of 2022 but remained below domestic-rated peers’. Specific loan loss allowance coverage of impaired loans (86% at end-1Q22) is particularly high by domestic standards but can be volatile given the high level of write-offs.

“The bank’s significant exposure to the Nigerian sovereign also drives our assessment of asset quality”, it said. The rating note indicates that operating returns on risk-weighted assets (RWA) have averaged 1.5% over the past four years.

The bank’s profitability is notably lower than Nigeria’s five largest banks due to weaker revenues and higher operating expenses, according to Fitch Ratings.

In 2021, operating returns declined to 1.5% of RWAs from 1.6% in 2020 on the back of strong balance-sheet growth, lower margins and higher loan impairment charges (LICs).

The rating added that the bank’s operating profit recovered strongly in 9M-2022 as it jumped up by 45%, supported by higher revenues and lower LICs. Read: Sterling Bank Extends 58% of Its Loan Portfolio to 20 Customers

Sterling’s FCC ratio declined to 14.5% at the end of 2021 from 16.8% in 2020 as a result of robust loan growth and other comprehensive income losses on investment securities representing 4.4% of equity.

The FCC ratio recovered to 15.1% in Q1-2022, supported by improving profitability and muted loan growth. Fitch said asset quality does not compromise Sterling’s capital position and pre-impairment operating profit provides a moderate buffer to absorb potential LICs through the income statement.

Its capital adequacy ratio settled at 14.8% in the first half of the year, comfortably above its 10% regulatory requirement, and there is modest dollar liquidity. Sterling’s gross loans/customer deposits is noted to be low, printed at 61% at the end of 9m-2022; reflecting the fairly liquid structure of its balance sheet.

The 20 largest foreign currency deposits made up about 65% of its total FC deposits in 2021. However, Fitch said high oil prices in 2022-2023 will support systemic FC liquidity conditions, mitigating risks posed by deposit concentration. # Fitch Affirms Sterling Bank at ‘B-‘; Withdraws Ratings