Fitch Ratings-London-15 February 2017: Fitch Ratings has revised the Outlook on 4 Nigerian banks to Negative from Stable and affirmed the Long-Term Issuer Default Ratings (IDRs) of 10 banks and financial institutions.
The affected institutions are Zenith Bank Plc (Zenith), First Bank of Nigeria Ltd (FBN), United Bank for Africa Plc (UBA), Guaranty Trust Bank Plc (GTB), Access Bank Plc (Access), Diamond Bank Plc (Diamond), Fidelity Bank Plc (Fidelity), Union Bank Plc (Union) First City Monument Bank Limited (FCMB), Wema Bank Plc (Wema) and the bank holding company, FBN Holdings Plc (FBNH). The National Ratings of Stanbic IBTC Bank Plc (SIBTC), as well as its bank holding company, Stanbic IBTC Holdings Plc (SIBTCH) are also affirmed.
The IDR Outlooks on Zenith and GTB (both at B+) have been revised to Negative following a recent similar action on Nigeria’s (B+) Outlook. The other two banks, whose Outlooks have been revised to Negative, are Diamond and FBN/FBNH and the revision reflects their weaker financial profiles. We have downgraded the Long-and Short-Term National Ratings of FBN/FBNH and Diamond to ‘BB+(nga)’ and ‘B(nga)’ respectively to reflect heightened vulnerability of capital due to downside asset quality risks.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS AND VIABILITY RATINGS
The IDRs of all the banks (except SIBTC/SIBTCH) are driven by Fitch’s assessment of their standalone creditworthiness as captured in their Viability Ratings (VRs). The IDRs are all in the ‘B’ range, indicating highly speculative fundamental credit quality, and factor in the banks’ weakened credit profiles due to challenging macro-economic conditions and market volatility. The operating environment continues to be affected by the oil price shock, slow GDP growth, continuing pressure on the naira, scarcity of hard currency in the FX interbank market and policy uncertainty.
The VRs continue to be pressured by tight foreign currency liquidity, asset quality deterioration and limited capital buffers. The sector remains largely profitable, but operating profits in 2016 were inflated by foreign currency revaluation gains (due to the sharp depreciation of the naira in June 2016). Foreign currency-adjusted ‘normalised’ operating profit, although still healthy, is vulnerable to rising loan impairment charges (LICs). As a consequence, the banks VRs remain in the highly speculative ‘b’ range.
Fitch is monitoring the banks’ ability to meet maturing external obligations given current difficult market conditions and limited supply of foreign currency from the Central Bank of Nigeria (CBN).
The new foreign-exchange regime has provided limited respite in accessing foreign currency in the interbank market. FX forward contracts provided by the CBN since June 2016 have helped the banks access foreign currency to reduce a large backlog of overdue trade finance obligations. These were either extended or refinanced with international correspondent banks.
Further depreciation of the naira against the US dollar would negatively impact banks’ regulatory capital ratios due to the translation effect of risk-weighted assets (RWAs). Some banks have limited buffers over regulatory minimums and further erosion of capital ratios beyond our expectations could be credit-negative.
GTB and Zenith are the highest rated banks in Nigeria with Long-Term IDRs and VRs of ‘B+’ and ‘b+’ respectively. These ratings are driven by solid company profiles, management quality and strong through-the-cycle performance. The Negative Outlooks on their Long-Term IDRs reflect Fitch’s view that they cannot be rated above the sovereign due to the close correlation between the domestic operating environment and their credit profiles, including large holdings of government securities.
UBA’s VR reflects the bank’s strong franchise and company profile, which includes a broad pan-African footprint, as well as healthy financial metrics, including adequate capital and leverage ratios and resilient earnings.
Access’s VR reflects the bank’s expanding franchise and market share as well as a strengthened business model and good track-record of execution. The rating also considers the bank’s healthy financial profile, including strong asset quality and capital ratios.
FBNH’s and FBN’s VRs reflect the group’s traditionally strong franchise and company profile in Nigeria and regionally and a large retail network. The VRs also factor in the bank’s very high non-performing loans (NPL) ratio, large loan concentrations to the oil sector and weak capital position. The Outlook on the Long-Term IDRs is revised to Negative to reflect continued pressure on capital as addressing its substantial asset quality problems will likely take time.
Diamond’s VR reflects the bank’s high risk appetite and weaker earnings. The Outlook on the Long-Term IDR is revised to Negative to reflect a very tight foreign currency liquidity position and pressure on capital arising from weak asset quality.
Fidelity’s VR reflects the institution’s strong second-tier franchise and sound capital ratios as well as sensitivity to high credit concentrations and weak earnings.
FCMB’s VR reflects the bank’s limited company profile, exposure to higher-risk segments, tight foreign currency liquidity and weak earnings generation.
Union’s VR reflects a high NPL ratio compared with peers, tight foreign currency liquidity and modest, albeit improving, revenue generation. It also reflects pressure on regulatory capital ratios, which the bank intends to address by raising core capital.
Wema’s VR reflects the bank’s small franchise, modest earnings and profitability and still low capital buffers. It also reflects a lower proportion of foreign currency assets and liabilities than peers’, meaning it is less affected by current liquidity pressures.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Ratings of ‘5’ and Support Rating Floors of ‘No Floor’ for all the banks reflect sovereign support is possible but cannot be relied upon. Fitch believes that the Nigerian authorities retain a willingness to support the banks, but their ability to do so in foreign currency is weak due to Nigeria’s low foreign currency reserves and revenues. In addition, we have limited confidence that any available reserves will be used to support the banks rather than to execute other priority policy objectives.
FBNH’s Support Rating of ‘5’ also reflects Fitch’s view that the authorities retain a low propensity to provide support to bank holding companies that do not have significant senior obligations.
SENIOR AND SUBORDINATED DEBT
The senior debt ratings of Zenith, Access (issued via the bank and Access Finance BV), GTB (issued via GTB Finance BV), Diamond and Fidelity are in line with their respective Long-Term IDRs.
The subordinated debt ratings of FBN (issued via FBN Finance BV) and Access are rated one notch below their respective VRs to reflect higher-than-average loss severity for subordinated relative to senior debt. No additional notches for non-performance risk have been applied.
National Ratings reflect Fitch’s opinion of each bank’s creditworthiness relative to the best credit in the country. We have downgraded the National Ratings of FBN/FBNH and Diamond to reflect their weaker financial metrics relative to peers.
SIBTC’s and SIBTCH’s National Ratings are based on the probability of support from their parent, Standard Bank Group Limited (SBG; BBB-/Negative). SBG has a majority 53.2% stake in SIBTCH, which owns 100% of SIBTC. Fitch believes SBG’s support would extend equally to both the bank and the holding company.
IDRS AND VRs
The IDRs are sensitive to rating action on the banks’ respective VRs. This is mostly likely to be triggered by further asset quality and capital deterioration as well as continued pressure on foreign-currency funding and liquidity.
FBN/FBNH’s and Diamond’s VRs face heightened sensitivity to a downgrade if asset quality, and therefore capitalisation, continues to deteriorate. For Diamond, additional weakening of its foreign currency liquidity position is also a rating sensitivity given its foreign currency refinancing risks.
Upside is limited for all banks’ VRs due to the difficult operating environment.
SUPPORT RATING AND SUPPORT RATING FLOOR
Upside to the SRs and SRFs of all banks is unlikely in the near term due to the recent downgrades and revisions (in November 2016). In the medium term, positive rating action could result from a significant improvement in the sovereign’s foreign-currency reserves and a significant improvement in foreign-currency liquidity in the system. It may also be triggered by clear evidence of timely extraordinary sovereign support for domestic banks, if required.
The banks’ National Ratings are sensitive to changes in their creditworthiness relative to other Nigerian entities. The National Ratings of SIBTC and SIBTCH are sensitive to a change in potential support (relating to both ability and propensity) from their ultimate parent, SBG. The National Ratings of SIBTCH and SIBTC could withstand a two-notch downgrade of SBG’s Long-Term IDR.
SENIOR AND SUBORDINATED DEBT
The senior debt ratings of Zenith, Access (issued via the bank and Access Finance BV), GTB (issued via GTB Finance BV), Diamond and Fidelity are sensitive to a change in their Long-Term IDRs.
The subordinated debt ratings of FBN (issued via FBN Finance BV) and Access are sensitive to a change in their VRs.