Jaiz Bank Faces Asset Quality Concerns – Ratings Note
Fitch Ratings has affirmed Jaiz Bank PLC’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook and its Viability Rating (VR) at ‘b-‘. In a report, the rating agency also affirmed the bank’s National Long-Term Rating at ‘BBB+(nga)’ and assigned a stable outlook but note that Islamic lender’s asset quality faces pressures.
Jaiz Bank’s IDRs are driven by its standalone creditworthiness, as expressed by its ‘b-‘ VR, Fitch said in its latest report on Nigerian banks.
It noted that the viability rating is constrained by the concentration of the bank’s operations in Nigeria’s challenging operating environment, a small franchise, weak revenue diversification, and asset-quality pressures.
The rating note revealed that Jaiz Bank’s National Long-Term Rating balances these features against stronger profitability and a more stable funding profile than peers’. Recently-elected President Tinubu has pursued key reforms faster than Fitch expected, completely removing fuel subsidies and liberalising the Nigerian naira within weeks of his inauguration.
These reforms overall are positive for the sovereign’s credit profile but pose near-term challenges including adding to inflationary pressures and risks of social unrest. The sharp depreciation of the naira will exert negative pressure on banks’ capital ratios, according to Fitch Ratings.
In Nigeria, Jaiz Bank Plc has a leading Islamic finance franchise, representing 52% of non-interest banking (NIB) sector assets at in 2022.
However, its market share of the domestic banking system remains small, at 0.5% at the end of the financial year 2022, according to the rating note, amidst high sovereign exposure.
The financial record shows its single-borrower credit concentration is high, Fitch Ratings said, saying that 20 largest customer exposures represent 38% of gross financing assets in 2022. The rating note said the bank’s lending to agriculture and related industries, viewed as relatively higher-risk, is high, estimated at about 36% of total financing at end-2022.
Nigeria’s sovereign exposure through sukuk and the Central Bank of Nigeria (CBN) cash reserves is very high, according to the rating note, adding that the bank would face asset quality pressures due to aggressive growth.
Fitch Rating specifically said Jaiz Bank has aggressively grown financing assets in recent years, which creates seasoning risks to asset quality. It noted that the Jaiz Bank impaired financing ratio increased markedly to 9.7% in 2022 from 5.9% due to economic challenges and seasoning of its financing portfolio.
Specific loss coverage of impaired financing assets was 47% at end-2022, underpinned by collateral, though the Islamic lender remains profitable in the sector. The operating return was a healthy 5.3% of risk-weighted assets (RWAs) in 2022, according to Fitch Ratings. It said Jaiz Bank’s healthy profitability is underpinned by wide net interest margins (NIM).
This reflects the highest asset yield in the banking system and, particularly, low funding costs. Profitability has improved notably in recent years, primarily due to greater cost efficiency.
On the downside, the non-interest bank’s revenue diversification is limited given the Islamic-banking business model, though it has good capitalisation to push higher.
Jaiz Bank is among the highest in terms of capital position in the banking sector, supported by a low-risk weighted asset density of 34% benefiting from an Islamic bank-specific discount of 50% to its RWAs.
Fitch said the bank’s strong pre-impairment operating profit provides a sizeable buffer to absorb impairment charges without affecting the capital. Amidst the FX reform in Nigeria, the bank’s capitalisation is noted to be less sensitive to the direct effects of naira depreciation than peers’ given its small share of foreign-currency (FC) assets in total assets.
The bank’s funding profile is dominated by a high percentage of current and savings accounts which printed at 87% of customer deposits in 2022 and, particularly, deposits from individuals (65%), supporting funding stability and low funding costs.
For the Islamic lender, depositor concentration is moderate, with the 20-largest depositors representing 17% of total customer deposits at the end of the financial year 2022. #Jaiz Bank Faces Asset Quality Concerns – Ratings Note Nigerian Treasury Bills Yield Rises to 7%
