Nigeria’s Zenith Bank will continue to display better asset quality indicators than its domestic peers and sound earnings generation amid slow economic recovery in Nigeria.
We are affirming our ‘B/B’ global scale and ‘ngBBB/ngA-2’ national scale ratings on Zenith.
The stable outlook on Zenith reflects that on Nigeria and our expectation that the bank’s earnings and asset quality metrics will remain broadly stable over the next 12 months.
S&P Global Ratings affirmed its ‘B’ long-term and ‘B’ short-term counterparty credit ratings on Nigeria-based Zenith Bank PLC (Zenith). The outlook is stable. At the same time, we affirmed our national scale ratings on the bank at ‘ngBBB/ngA-2′.
The affirmation reflects our view that Zenith will continue to display better asset quality indicators than its domestic peers and sound revenue generation over the next 12 months amid slow economic recovery in Nigeria.
With total assets of Nigerian naira (NGN) 4.9 trillion (approximately US$15.7 billion) on June 30, 2017, Zenith is the largest bank in Nigeria. The bank has the strongest corporate franchise in the country and benefits from stable funding.
Zenith recorded a stable funding ratio of 123% on the back of a healthy proportion of deposit funding at mid-2017. Net broad liquid assets covered 74% of short-term deposits and 15x short-term wholesale funding at thesame date.
However, given the short-dated nature of the bank’s deposit profile, which is a feature it shares with its domestic peers, Zenith’s deposit base is confidence sensitive.
Zenith’s asset quality metrics deteriorated slightly in the first half of 2017, with the nonperforming loan (NPL) ratio reaching 4.3% at June 30, 2017, from 3.0% at end-2016.
Similarly, cost of risk increased to 3.6% at June 30, 2017, versus 1.5% at end-2016. As a result, NPL coverage by provision ratio increased to 113% at mid-2017. While we note that restructured exposures have increased significantly to around 11% of total loans at mid-2017, we expect asset quality indicators to remain broadly stable, because we do not anticipate material migrations of these exposures to NPLs. We therefore believe that the bank’s cost of risk will decline to around 1% in the next 12-18 months.
We assess Zenith’s capitalization as moderate. The bank’s S&P Global Ratings’ risk-adjusted capital (RAC) ratio before adjustments reached 5.1% at end-2016.We expect this ratio will remain slightly above 5% over the next 12-18 months.
We factor into our RAC calculation our expectations of loan growth of around 8%-10%, a moderate interest margin contraction (following the issue of a $500 million Eurobond in May 2017), good non-funded income generation, and a measured dividend distribution.
The stable outlook on Zenith reflects that on Nigeria, and our expectation that the bank’s earnings and asset quality metrics will remain broadly stable over the next 12-18 months.
We would lower the ratings on the bank if we lowered the ratings on Nigeria, or if we see a material deterioration in the bank’s asset quality indictors resulting in inflated provisioning needs and declining capitalization.
An upgrade is remote in the next 12 months, because it would hinge on an upgrade of Nigeria as well as a material strengthening of the bank’s asset quality indicators, all other factors remaining equal.