Jaiz Bank Gets Ratings Upgrade on Improved Capitalisation
Jaiz Bank Plc gets ratings upgrade on Friday from the emerging market-focused rating firm, GCR which lifts the Islamic lender’s national scale long-term and short-term issuer ratings to BBB-(NG) and A3 (NG) from BB+ (NG) and B (NG) respectively with a stable outlook.
GCR said in a new rating said the upgrade reflects Jaiz Bank improved competitive position as a niche player in the highly competitive banking industry and the recent improvement in capitalisation metrics following an injection of additional capital of N3.3 billion through a private placement during 2021.
However, the firm mentioned its modest market position despite benefitting from the non-interest banking niche as major constraining factors to the ratings.
This also includes Islamic lender high credit losses in the financing and investing books and the fact that deposit book is dominated by unrestricted account holders without any reserve in place to cushion fluctuations.
Jaiz, the first fully-fledged non-interest bank in Nigeria was licenced by the Central Bank of Nigeria in 2011, and has since been leveraging its position as a first-mover in a niche of the highly competitive banking industry and paving the way for other new entrants into the space.
Nevertheless, Jaiz’s market share is estimated at a modest 0.4% of the industry total assets and loans, and 0.5% of deposits as of the financial year 2020.
GCR hinted that the bank competitive position assessment is supported by the fairly strong brand franchise, the demonstrated shareholders support through injection of additional capital when needed.
This includes relatively good diversification in business lines and products, and sustained growth trajectory in earnings, with a return on equity of approximately 18% in 2020, ranking above the industry average.
However, the rating notes maintained that these strengths are partly offset by the limitation in geographical diversification, given the domiciliation of its operation in Nigeria and overall customer base of less than one million.
The Islamic lender’s capitalisation metrics is considered a positive rating factor, GCR Ratings said in the note.
It added that GCR’s calculated core capital adequacy ratio slightly increased to 23% in the third quarter of the financial year 2021 from 22% in 2020 following the injection of additional N3.3 billion through a private placement offered to one of the existing shareholders.
Loan loss reserve coverage of stage 3 loans is considered moderate at around 43%, with partial consideration for the inherently high level of collateral against the loan book, the rating note indicates.
“We expect the core capital ratio to remain within the 20-23% range over the next 12-18 months”, GCR Ratings said, adding that the bank’s risk profile is considered high relative to peers.
The ratings said given the unique characteristics of the non-interest financing book as transaction-based, the covid-19 pandemic and the subsequent disruptions to most business operations hindered the capacity of most borrowers to repay their loans in line with the contractual agreements.
As a result, stage 3 non-performing financing increased to N8.6 billion in 2020 from N4. 8 billion in 2019, translating to non-performing financing and investing ratio of 11.1% at the end of the financial year 2020.
Post-Covid resumption of activities, together with the restructuring of some of the affected accounts, has seen the ratio moderate to around 9% as of third quarter of the financial year 2021
Similarly, GCR ratings Limited revealed that credit losses escalated to 4.5% from 2.2% in 2020 but moderated to 3.6% by the first half of the financial year 2021. Read Also: Jaiz Bank Holds 62% of Islamic Banking Assets in Nigeria
“While cognisance is taken of the fact that the financing book is well collateralised, which is very common with the non-interest banks, Jaiz’s book is highly collateralised by legal mortgages, and GCR views this with caution, considering the cumbersome judicial process involved in title perfection and the realisation of such collateral in Nigeria.
“That said, the bank displayed a good degree of diversification by obligors and sectors. Looking ahead, we expect the bank to continue to contain credit losses within the current range over the next 12-18 months and more feasible improvements over the medium-term”, GCR Ratings said.
Funding and liquidity
The rating note hinted that while Jaiz’s liquidity profile is considered sound, the funding base’s risk score is moderated by the fact that the deposit book is dominated by unrestricted investment account holders.
As of December 2020, the bank’s funding base was predominately supported by customer deposits and of which the more volatile unrestricted account holders accounted for 58%.
GCR expects the funding and liquidity metrics to remain at a strong level over the next 12-18 months and possibly improve once the bank commences the implementation of reserved in respect of the unrestricted accounts.
The stable outlook reflects an expectation that the bank will continue to grow its market share and defend its market position as much as possible, said GCR Ratings.
“We expect that asset quality metrics will continue to improve over the short to medium-term, particularly with the ongoing review of the bank’s risk management system”, it added. #Jaiz Bank Gets Ratings Upgrade on Improved Capitalisation
Read Also: Islamic Lender Jaiz Bank Posts Sky-High Earnings Growth
