GCR Ratings: Providus Bank Seeks to Boost Capital to Avert Downgrade

GCR Ratings: Providus Bank Seeks to Boost Capital to Avert Downgrade

GCR Ratings, a leading emerging market focused ratings agency, has attached its stable outlook for Providus Bank on the expectation that regulator capital adequacy ratio will be boosted once its retain earning is capitalised and ongoing capital raise is successfully concluded.

In a recent report, GCR affirmed Providus Bank national scale long and short-term issuer ratings of BB (NG) and B (NG) respectively; with a stable outlook. Providus bank is in the process of raising N6.5 billion, GCR said, adding that it expects to see improvement in capital adequacy ratio at the end of 2021.

The emerging market ratings agency stated that the ratings accorded to Providus Bank reflects its limited competitive position, relatively stable funding structure, intermediate capitalisation, adequate liquidity, and moderate risk position.

It added that an upward rating could be triggered following a sustained improvement in the regulatory capital adequacy ratio, moderation in credit losses while maintaining liquidity at a sound level.

“We may lower the ratings if asset quality materially deteriorates and/or if the regulatory capital adequacy ratio remains at its current level”, it added. Providus bank ranks among the tier 3 banks in Nigeria, having a limited track record of about five years in the local commercial banking space.

In its ratings report, GCR said Providus controls a moderate market share of 0.8% and 0.9% in terms of the industry total assets and deposits respectively in FY20.

Furthermore, it noted that the lender’s competitive position is constrained by its evolving brand franchise, short track record, and limited local geographical diversification as a regional licenced bank.

Given the small customer base, GCR stated in its report that Providus faces high concentration risk, with the twenty largest obligors and depositors constituting 46.1% and 51.9% of gross loans and deposits respectively in 2020.

“Though the bank operates with a regional licence and has only 10 branches, management confirmed to be serving customers across the country through aggregators, who are into agency banking, fintech, among others”, the report said.

Meanwhile, the report said the bank capitalisation is viewed at an intermediate level, with the GCR core capital ratio closing the financial year 2020 at 18.1% from 20.5% 2019.

However, GCR takes note of the regulatory capital adequacy ratio, which exceeded the regulatory minimum at 10.5% in 2020, has a very thin buffer.

“Looking ahead, the bank is currently in the process of a capital raise of about N6.5 billion and, accordingly, we expect to see a significant improvement in the CAR at end-December 2021 notwithstanding the bank’s aggressive loan growth pace”.

GCR said Providus Bank risk position is viewed to be contained, evidenced by the gross non-performing loans ending strongly below the Central Bank of Nigeria tolerable maximum limit of 5% and the industry average of about 6% at 2.6% in 2020 from 19:4.4% in 2019.

“We believe that the strength of the bank’s risk management is yet to be fully tested given its relatively short track record”, GCR added.

It however stated that credit losses of 3.2% booked at the financial year 2020 is considered somewhat elevated, albeit in line with the industry average of 3%.

“Concentration by the obligor is considered moderately high, having the single and twenty largest exposures accounting for 3.4% and 46.1% respectively of the loan book at FY20.

“We expect a more diversified loan book over the short to medium term, as the bank continues to strategically expand its lending activities”, GCR stated.

In addition, GCR considered the bank foreign currency risk as minimal, with foreign currency loans constituting only about 6% of the exposures at FY20.

It further stated that the lender’s funding and liquidity position is assessed at an intermediate level, noting that Providus Bank is largely funded through customer deposits, which has constituted around 70% of the funding base over the review period.

The deposit book, which grew by almost 200% in FY20, reflected the bank’s focus on low-cost deposits, as the average cost of funds for the year was below 3%. GCR noted.

It also added that the bank has a good liquidity record, evidenced by the highly liquid nature of the balance sheet over the review period.

As of FY20, the report said GCR liquid assets covered total wholesale funding moderately by 2.2x, while the ratio of GCR liquid assets to total customer deposits stood at 69% from 41.3% in 2019.

“In addition, the matching of assets and liabilities maturities at FY20 reflected cumulative liquidity buffer across the various maturity bands”, GCR Ratings explained.

Outlook Statement

The ratings said the lender’s stable outlook reflects GCR’s expectations that the regulatory capital adequacy ratio will be boosted once the retained earning is capitalised, and the ongoing capital raise is successfully concluded.

“We also anticipate a better GCR core capital ratio, supported by sound internal capital generation and adequate loan loss reserving”, it added.

GCR Ratings: Providus Bank Seeks to Boost Capital to Avert Downgrade