Fitch Ratings has affirmed Ecobank Nigeria Limited’s (ENG) Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook. Fitch has also affirmed its National Long-Term Rating at ‘BBB (nga)’ and assigned a Stable Outlook.
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ENG’s IDR is 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 and exposure to market risks, asset-quality issues, weak profitability and modest capitalisation in the context of these risks.
ENG’s National Long-Term Rating is among the lowest of all Nigerian banks under Fitch’s coverage, which primarily reflects its weak earnings and modest capitalisation.
Challenging Operating Environment: Banks continue to contend with US dollar shortages and the Central Bank of Nigeria’s (CBN) highly burdensome cash reserve requirement. Fitch expects reform progress under the new administration, including elimination of fuel subsidies and gradual liberalisation of the naira. However, there is a risk of sharp depreciation due to the large disparity between the official and parallel exchange rates. The CBN has increased its policy rate by 700bp since April 2022 (currently 18.5%) due to rising inflation (22% in 4M23).
Subsidiary of Pan-African Group: ENG has moderate market shares of domestic banking-system assets (3.7% at end-2022). However, 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).
High Sovereign Exposure: Single-borrower credit concentration is very high, with the 20-largest loans representing 64% of gross loans and 271% of Fitch Core Capital (FCC) at end-2022. Oil and gas exposure (end-2022: 38% of gross loans) and foreign-currency (FC) lending (end-2022: 56% of net loans) are among the highest in the banking system. Sovereign exposure through securities and CBN cash reserves is high relative to FCC (over 425% at end-2022).
High Stage 2 Loans: ENG’s impaired loans (Stage 3 loans under IFRS 9) ratio declined significantly to 6.9% at end-2022 (end-2021: 16.3%), primarily due to write-offs and a USD200 million impaired loans sale to an ETI-owned resolution vehicle. Specific loan loss allowance coverage of impaired loans was 52% at end-2022. Stage 2 loans (end-2022: 25% of gross loans; concentrated within oil and gas and largely US dollar-denominated) remain high and represent a key risk to asset quality. Fitch forecasts the impaired loans ratio to increase moderately in the near term.
Weak Profitability: ENG has notably weaker profitability than other commercial banks, with operating returns on risk-weighted assets averaging just 0.4% over the past four years. Weak profitability is influenced by a particularly narrow net interest margin (NIM) and high loan-impairment charges (LICs) that have accompanied asset-quality issues in recent years. Fitch expects profitability to remain weak in the near term.
Modest Capitalisation: ENG’s FCC ratio declined to 16.2% at end-2022 from 17.9% at end-2021 due to robust asset growth, but impaired loans net of specific loan-loss allowances fell materially to 14% of FCC at end-2022 (end-2021: 37%) as a result of the impaired loans sale. The transaction also improved ENG’s total capital adequacy ratio (CAR) to 13.3% at end-2022 (end-2021: 11.5%) due to the elimination of a penalty for breaching the single-obligor limit. However, capitalisation is modest in view of high creditor concentrations, high FC lending and greater exposure to a devaluation of the naira than peers.
Sound Liquidity Coverage: Reliance on term-deposit funding (end-2022: 40% of customer deposits) is material but has decreased slightly in recent years and is expected by Fitch to decrease further. Deposit concentration is fairly high, with the 20-largest deposits representing 21% of customer deposits at end-2022. ENG has modest holdings of FC liquid assets relative to peers but benefits from ordinary FC liquidity support from the group.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A sovereign downgrade could result in a downgrade of ENG’s VR and Long-Term IDR if Fitch believes that the direct and indirect effects of a sovereign default would likely erode capitalisation and FC liquidity insofar as to undermine the bank’s viability.
Absent a sovereign downgrade, a downgrade of ENG’s VR and Long-Term IDR could result from the combination of sharp naira depreciation and a marked increase in the impaired loans ratio, resulting in a breach of minimum capital requirements without near-term prospects for recovery. It could also result from a severe tightening of FC liquidity.
A downgrade of the bank’s National Ratings would result from a weakening of its creditworthiness relative to other Nigerian issuers’.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of ENG’s VR and Long-Term IDR would require a sovereign upgrade, improved profitability and strengthened capitalisation in the context of high credit concentrations and exposure to market risks.
An upgrade of the bank’s National Ratings would result from a strengthening of its creditworthiness relative to other Nigerian issuers’.
Other Debt and Issuer Ratings: Key Rating Drivers
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 that of the bank. The Recovery Rating of these notes is ‘RR4’, indicating average recovery prospects in the event of default.
ENG’s Shareholder Support Rating (SSR) of ‘ccc+ captures ETI’s high propensity to provide support to ENG but its constrained ability to do so due to ENG’s large size. Fitch sees a high propensity to provide support given ENG’s importance to the parent’s pan-African strategy as its largest subsidiary (end-2022: 22% of consolidated group assets) and also because it operates in SSA’s largest economy.
Other Debt and Issuer Ratings: Rating Sensitivities
The senior unsecured debt rating would move in tandem with ENG’s Long-Term IDR.
A change in ETI’s ability or propensity to provide support would lead to a change of the SSR. A change in ETI’s ability to provide support would most likely be indicated by a change in its Long-Term IDR.
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.
References for Substantially Material Source Cited as Key Driver Of Rating
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
