Fitch Ratings – London – 24 Jan 2022: Fitch Ratings has affirmed Ecobank Nigeria Limited’s (ENG) Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook. Fitch has simultaneously upgraded ENG’s National Short-Term Rating to ‘F2(nga)’ from ‘F3(nga)’. A full list of rating actions is detailed below.
Fitch has withdrawn ENG’s Support Rating as it is no longer relevant to the agency’s coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned a Shareholder Support Rating (SSR) of ‘ccc+’. Fitch has also withdrawn ENG’s Long-Term Local Currency IDR, which was published in error.
KEY RATING DRIVERS
IDRS AND VIABILITY RATING
The IDRs of ENG are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR) of ‘b-‘. The VR reflects the concentration of its operations within Nigeria’s challenging operating environment, high credit concentrations, asset-quality weaknesses, modest profitability and weak capitalisation in the context of these risks. It also reflects a sizeable franchise and a healthy funding and liquidity profile.
ENG has moderate market shares of Nigeria’s banking-sector assets (4% at end-2020) but its franchise benefits from being a subsidiary of Ecobank Transnational Incorporated (ETI; B-/Stable); a large pan-African banking group with operations spanning 33 countries across sub-Saharan Africa (SSA).
Single-borrower credit concentration is very high, with the 20 largest loans representing 69% of gross loans and 288% of Fitch Core Capital (FCC) at end-1H21. Exposure to the oil and gas sector is the highest in the banking sector (41% of gross loans; 171% of FCC at end-1H21) and is weighted towards the upstream segment, posing a significant risk to ENG’s standalone creditworthiness in the event of a prolonged period of low oil prices and production cuts. Foreign-currency (FC) lending is also the highest of all banks under our coverage (54% of gross loans at end-1H21), partly reflecting high oil and gas lending. ENG intends to gradually reduce its oil and gas exposure over the medium-term.
ENG’s impaired loans (Stage 3 loans under IFRS 9) ratio of 17% at end-1H21 is higher than that of peers but has improved in recent years, declining from 23.9% at end-2019 as a result of loan reclassifications, recoveries and write-offs. The impaired loans ratio is expected to decline further over the next 18 months, driven by the reclassification of two large upstream oil exposures following the commencement of production amid higher oil prices and resumption of loan growth. Specific loan loss allowance coverage of impaired loans (35% at end-1H21) is low, reflecting strong collateral coverage of the two large upstream exposures.
Stage 2 loans have declined in recent years but remain high (26% of gross loans at end-1H21). Fitch does not see a high risk of the largest Stage 2 loans, which are concentrated within the oil and gas sector, of becoming impaired. Our asset-quality assessment is positively influenced by a substantial amount of non-loan assets, largely comprising government securities and cash reserves at the Central Bank of Nigeria (CBN).
ENG delivers the weakest profitability of all Nigerian banks under our coverage, with operating returns on risk-weighted assets (RWAs) averaging 0.4% over the past four full years. Weak profitability is influenced by a weak net interest margin, which reflects a highly dollarised loan book, material reliance on term-deposit funding and the continued influence of a CBN directive to stop accruing interest on loans to oil marketers – to which ENG has sizeable exposure. Weak profitability has also been highly influenced by large loan impairment charges (LICs), which have eroded 76% of pre-impairment operating profit on average over the past four full years. Fitch expects profitability to improve moderately with receding asset-quality pressures and lower LICs.
ENG’s FCC ratio declined to 16.2% at end-1H21 from 20.2% at end-2020, as a result of large negative fair-value adjustments on fixed-income securities held at fair value through other comprehensive income. ENG’s total capital adequacy ratio (CAR; 19.6% at end-1H21) maintains a comfortable buffer above the 10% regulatory requirement for a bank with a national licence and the bank’s tangible leverage ratio (10.7% at end-1H21) compares favourably with that of peers. Impaired loans net of specific loan loss allowances represented a significant 46% of FCC at end-1H21 but risks to capital are mitigated by strong collateral coverage and recovery expectations of the two large upstream impaired loans. Pre-impairment operating profit is weak, providing only a small cushion to absorb potential LICs without affecting capital.
Funding is mainly in the form of customer deposits (80% of non-equity funding at end-1H21). ENG has a material reliance on more expensive term-deposit funding (38% of customer deposits at end-1H21) but this reliance has reduced in recent years (from 47% at end-2019) and is expected to reduce further as a result of continued growth in demand and savings accounts. Deposit concentration is moderate, with the 20-largest deposits representing 24% of customer deposits at end-1H21. Non-deposit funding is mainly in the form of FC intergroup placements, a USD300 million senior unsecured eurobond due 2026 and local-currency funds for on-lending.
ENG’s low gross loans/customer deposits ratio (67% at end-1H21) largely reflects a small loan book. Large cash reserves at the CBN, net interbank placements and unpledged central-government securities represented 33% of total assets and 50% of customer deposits at end-1H21, providing healthy liquidity coverage. Our funding and liquidity assessment also considers the benefits of ordinary liquidity support from ETI.
Fitch’s view of support for ENG considers the high propensity of ETI to provide support, given the former’s importance to the parent’s pan-African strategy as its largest subsidiary (22% of group assets at end-1H21) and it operating in SSA’s largest economy. It also considers the material reputational damage to ETI that would accompany ENG’s default, the 100% ownership, a high degree of management and operational integration and a record of capital support.
However, ETI’s ability to provide support, if required, is constrained by its creditworthiness and ENG’s large size relative to that of the group. ENG’s SSR of ‘ccc+’ therefore reflects Fitch’s view that, although possible, extraordinary support cannot be relied on.
ENG’s National Long-Term Rating of ‘BBB(nga)’ is constrained by the bank’s high credit concentrations, asset-quality weakness, modest profitability and weak capitalisation in the context of these risks. ENG’s National Short-Term Rating has been upgraded to the higher of two possible options for a ‘BBB(nga)’ National Long-Term Rating under Fitch’s criteria, reflecting an improved funding and liquidity profile, which reduces the vulnerability of default on the bank’s short-term local-currency obligations within Nigeria.
SENIOR UNSECURED DEBT
Senior unsecured debt issued through EBN Finance Company B.V. is rated at the same level as ENG’s Long-Term IDR, reflecting Fitch’s view that the likelihood of default on these obligations is the same as the likelihood of default of the bank. The Recovery Rating of these notes is ‘RR4’, indicating average recovery prospects.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A downgrade of the Long-Term IDR and VR would most likely result from increased asset-quality pressures, as indicated by increased impaired loans or reduced recovery prospects for existing impaired loans, that lead to operating losses and a decline in capital metrics
A weakening in ETI’s ability or propensity to provide support would lead to a downgrade of the SSR. Reduced ability to provide support would most likely be indicated by a downgrade of ETI’s Long-Term IDR
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- An upgrade of the Long-Term IDR and VR would require a significant improvement in asset quality and profitability and reduced credit concentrations while maintaining acceptable capital ratios
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.
The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit