LONDON/PARIS, November 29 (Fitch) Fitch Ratings has assigned Nigeria-based Sterling Bank Plc (Sterling) a Long-Term Issuer Default Rating (IDR) of ‘B-‘ and a National Long-Term Rating of ‘BBB-(nga)’. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS AND VR Sterling’s IDRs are driven by its standalone creditworthiness as defined by its Viability Rating (VR). The VR is constrained by challenging operating conditions in Nigeria, the bank’s modest franchise and developing business model, weaknesses in its financial profile, and its higher risk appetite than peers. These factors are counterbalanced by Sterling’s coherent strategy, especially its business transformation initiatives, and strong management team. Sterling’s financial profile is characterised by high credit concentrations, variable earnings and profitability, modest capital buffers based on its risk profile, and its structurally weak funding and liquidity profile. Sterling has a high exposure to the oil and gas sector, representing 45% of gross loans at end-9M17, mainly to mid-sized corporates. Around 38% of the bank’s loans at end-9M17 were in foreign currency, exposing it to currency volatility. Sterling’s impaired loans ratio (based on IFRS) increased to 3.5% at end-9M17 from 1.7% at end-2016, arising mainly from the troubled oil and gas sector. Based on prudential requirements (all loans that are 90 days overdue), Sterling’s NPL ratio was 6.1% at end-9M17. While both its impaired loans ratio and NPL ratio are below sector averages, we believe Sterling’s asset quality remains highly sensitive to loan concentrations by industry and obligor. There is inherent instability in Sterling’s funding base. 40% of the bank’s customer deposits are from corporates, which, in our view, are price-sensitive and less stable. These deposits are also predominately short-term, exposing the bank to significant structural asset-liability maturity mismatches. Additionally, the deposit base is highly concentrated. Sterling is addressing funding and liquidity risks by raising market funding, demonstrating good access to borrowed funds and debt securities issuance. Positively, we also note that the bank has successfully attracted more stable retail deposits, including strong growth in ‘non-interest-bearing’ deposits (albeit from a low base). With the rollout of the new strategy and franchise development, we expect any structural weaknesses in the customer deposit base to be resolved over time. We believe the bank’s capital buffers are low (Fitch Core Capital Ratio of 13.2% at end-9M17), particularly due to its sensitivity to concentration risks. Sterling reported a Basel II total capital adequacy ratio of 11.4% at end-9M17, a modest buffer against its regulatory minimum of 10%. In addition to higher retained earnings and by repositioning its balance sheet, the bank is expected to raise subordinated debt in the domestic market (which counts towards Tier 2 regulatory capital) to improve capital buffers. In the medium term, we expect Sterling’s prospects to improve as the franchise strengthens with the expansion of its retail/SME and ‘non-interest-bearing’ lines and business reorganisation. SUPPORT RATING AND SUPPORT RATING FLOOR Similar to other Nigerian banks, Sterling’s Support Rating (SR) of ‘5’ and Support Rating Floor (SRF) of ‘No Floor’ reflect our view that sovereign support is possible but cannot be relied upon. Fitch believes the authorities retain willingness to support the banking system, but their ability to do so particularly in foreign currency is weak due to Nigeria’s relatively modest foreign-currency buffers. In addition, we have limited confidence that any available resources will be used to support the banks rather than to execute other priority policy objectives. NATIONAL RATINGS Sterling’s National Ratings reflect Fitch’s opinion of its standalone creditworthiness relative to the best credits in the country. The National Long- and Short-Term Ratings of ‘BBB-(nga)’ and ‘F3(nga)’ take into account Sterling’s overall risk profile relative to other Nigerian banks, including its limited franchise and weak financial metrics. RATING SENSITIVITIES IDRS AND VR The bank’s IDRs are sensitive to rating action on its VR. This would most likely be triggered by a material deterioration in asset quality that would add further pressure to Sterling’s already weak capital position (end-9M17: regulatory Basel II total capital adequacy ratio of 11.4%) with a small buffer over its minimum regulatory capital requirements (10%). Any pronounced instability in Sterling’s funding profile could also put negative pressure on the bank’s VR. SUPPORT RATING AND SUPPORT RATING FLOOR Upside to the bank’s SR and SRF is unlikely in the near term due to Nigeria’s weak ability to provide support. In the medium term, positive rating action could result from a significant improvement in either the sovereign’s foreign-currency reserves or foreign-currency liquidity in the system. It could also be triggered by clear evidence of timely extraordinary sovereign support for domestic banks if required. NATIONAL RATINGS The bank’s National Ratings are sensitive to changes in its standalone creditworthiness relative to other Nigerian entities. The rating actions are as follows: Long-Term Foreign-Currency IDR assigned at ‘B-‘; Outlook Stable Short-Term Foreign-Currency IDR assigned at ‘B’ Viability Rating assigned at ‘b-‘ Support Rating assigned at ‘5’ Support Rating Floor assigned at ‘No Floor’ National Long-Term Rating assigned at ‘BBB-(nga)’ National Short-Term Rating assigned at ‘F3(nga)’ e information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. 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