Moody’s affirms Banks ratings following action on the Nigerian government; changes outlook to negative

Moody’s Investors Service, an international rating agency has affirmed the B2 long-term local currency deposit ratings of Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Plc, Union Bank of Nigeria Plc, Fidelity Bank Plc, FCMB Limited and Sterling Bank Plc.

The outlook on all the banks’ long-term deposit ratings was changed to negative from stable.

The rating action follows Moody’s decision to affirm Nigeria government’s long-term issuer ratings of B2 and change its outlook to negative from stable in December 4, 2019.

The affirmation of the ratings reflects the banks’ financial profiles which have been generally resilient to the difficult operating environment in Nigeria.

On average, the Nigerian banks benefit from good pre-provision profitability and capital positions; asset quality and foreign currency funding positions have improved over recent quarters, following the recession in 2016.

The change of outlook to negative from stable reflects the Nigerian banks’ sizeable exposure to the sovereign debt securities and loans, averaging at 244 percent of the rated banks’ capital bases as of June 2019, which links their credit profiles to that of the government. The rating agency also expects the banking sector to be challenged in maintaining the recent improving trend, particularly as regards asset quality, given the increasing bank lending in Nigeria’s weak operating environment.

The affirmation of the ratings reflects Moody’s expectation that Nigerian banks’ profitability will remain resilient and the capital metrics stable over the next 12-18 months, with a tangible common equity as a percentage of Moody’s adjusted risk-weighted assets at about 16 percent in the next 12 months.

Recent selective lending by banks has reduced the formation of new nonperforming loans (NPLs), which lessens the need for loan loss provisions and limits the erosion of profitability. Systemwide NPLs declined by 51 percent to N1.1 trillion as at 30 September 2019 from N2.2 trillion as at 30 September 2018, driven by a large decline in NPLs in the oil and gas sector.

As result, the NPL ratio declined to 6.7 percent as at 30 September 2019 compared to 14.2 percent as at 30 September 2018.

In addition, Nigerian banks are containing their operating cost as they migrate their clients to digital platforms and save on branch expansion.

The banks’ foreign currency funding has also improved as banks cut back foreign-currency lending while building up foreign-currency deposits.

The negative outlook on the banks’ rating is primarily driven by the negative outlook on the Nigeria’s government issuer rating given the banks’ large holdings of Nigerian government securities which they hold for liquidity and investment purposes. The large stock of government securities and loans links the banks’ credit profiles to that of the government. The rated banks’ overall sovereign debt securities and loans exposure averaged 244 percent of their tangible capital bases as of June 2019. In view of the correlation between the sovereign and bank credit risk, the banks’ standalone credit profiles and ratings are inevitably constrained by the rating of the government.

The rating agency also expects the banking sector to be challenged in maintaining the recent improving trend, particularly as regards asset quality, given the rising bank lending in Nigeria’s weak operating environment. The rating agency expects GDP growth of just over 2 percent over the next few years, which will remain insufficient to create significant good quality lending opportunities for banks and it will unlikely improve borrowers’ credit strength.

Bank-Specific Considerations

Access Bank Plc

The negative outlook reflects the negative outlook on Nigeria’s government issuer rating, affecting the bank’s credit profile as well as resulting in a lower ability to support the b3 baseline credit assessment (BCA). Access has a large exposure to the sovereign debt securities and loans at 338 percent of its tangible common equity at end of June 2019. Access’s local currency deposit rating is B2 while the local currency national scale rating is A1.ng.

Access’s b3 BCA reflects the bank’s (1) relatively high asset risks, although improving, following the merger with Diamond Bank PLC (Diamond) and (2) higher leverage, with a total shareholders’ equity-to-total assets ratio that is below peer average. These challenges are balanced against (1) our expectation that Access will extract long-term benefits from Diamond, particularly by improving its profitability (2) the bank’s robust underwriting standards and risk management processes, and (3) the bank’s deposit-based funding structure.

First City Monument Bank Limited

The negative outlook reflects the negative outlook on Nigeria’s government issuer rating, affecting the bank’s credit profile as well as resulting in a lower ability to support the b3 BCA. FCMB has a large exposure to sovereign debt securities and loans at 239 percent of its tangible common equity at end of June 2019. FCMB will likely be more exposed to negative pressure on its revenue generation capacity and its asset quality than its top-tier local peers due to its relatively small size and client base. FCMB’s local currency deposit rating is B2 while the local currency national scale rating is A2.ng.

FCMB’s b3 BCA reflects its (1) elevated credit risks stemming from high single-name and sector concentrations; and (2) relatively modest profitability levels compared with those of its top-tier local peers. These challenges are balanced against its (1) robust levels of tangible common equity compared with that of its global peers, (2) stable deposit-based funding structure, and (3) robust local-currency liquidity buffers.

Fidelity Bank Plc

The negative outlook reflects the negative outlook on Nigeria’s government issuer rating affecting the bank’s credit profile as well as resulting in a lower ability to support the b3 BCA. Fidelity has a large exposure to sovereign securities and loans at 196 percent of its tangible common equity as of June 2019. Fidelity will likely be more exposed to negative pressure on its revenue generation capacity and asset quality than its top-tier local peers due to its relatively small size and client base. Fidelity’s local currency deposit rating is B2 while the local currency national scale rating is A2.ng.

Fidelity’s b3 BCA reflects the bank’s (1) relatively tight funding conditions, as reflected by its high, although improving, loan-to-customer deposit ratio; and (2) high proportion of foreign-currency loans. These challenges are mitigated by Fidelity’s (1) relatively high provision coverage of NPLs; and (2) solid capital buffers with a tangible common equity-to-risk-weighted asset that is comparable to global peers, although the bank’s capital buffer against the regulatory requirement is small.

First Bank of Nigeria Limited

The negative outlook reflects the negative outlook on Nigeria’s government issuer rating, affecting the bank’s credit profile as well as resulting in a lower ability to support the b3 BCA. First Bank has a large exposure government debt securities and loans at 267 percent of its tangible common equity at end of June 2019. First Bank’s local currency deposit rating is B2 while the local currency national scale rating is A2.ng.

First Bank’s BCA of b3 reflects its (1) still-high stock of NPLs, although reducing, and (2) moderate capital buffers. These challenges are moderated by the bank’s resilient pre-provision profitability and stable funding profile, which is supported by a large stock of liquid assets.

Guaranty Trust Bank Plc

The negative outlook reflects the negative outlook on Nigeria’s government issuer rating. Guaranty has a large exposure to government debt securities and loans at 136 percent of its tangible common equity at end of June 2019. Guaranty’s local currency deposit rating is B2 while the local currency national scale rating is Aa3.ng.

Guaranty’s BCA of b2 reflects its (1) resilient earnings generation capacity and robust capital buffers; (2) high liquidity buffers and its predominantly deposit funded balance sheet; and (3) robust franchise, which allows the bank to earn relatively higher margins and relatively low credit costs. These challenges are balanced against elevated single-name and sectoral concentration risks.

Union Bank of Nigeria Plc

The negative outlook reflects the negative outlook on Nigeria’s government issuer rating, affecting the bank’s credit profile as well as resulting in a lower ability to support the b3 BCA. Union has large exposure to government debt securities and loans at 211 percent of its tangible common equity as of June 2019. Union will likely be more exposed to negative pressure on its revenue generation capacity and asset quality than its top-tier local peers due to its relatively small size and client base. Union’s local currency deposit rating is B2 while the local currency national scale rating is A2.ng.

Union’s b3 BCA reflects the bank’s (1) high asset risks and low coverage of NPLs by provisions, which increases the risk of capital erosion in case of loan losses; (2) weak efficiency and moderate profitability; and (3) still-tight, although improving, foreign-currency funding position. These challenges are moderated by the bank’s stable deposit-based funding profile, particularly in local currency.

United Bank for Africa Plc

The negative outlook reflects the negative outlook on Nigeria’s government issuer rating. UBA has a large exposure to government debt securities and loans via its Nigerian operations that contributed 71 percent to its total assets as of June 2019. Total exposure to government securities was large at 231 percent of the bank’s total shareholders’ equity. UBA’s local currency deposit rating is B2 while the local currency national scale rating is A1.ng.

UBA’s b2 BCA reflects the bank’s (1) moderate asset risk profile, supported by its relatively more diversified loan book than that of its local peers; (2) resilient profitability, which supports its capital buffers; and (3) predominantly deposit-funded balance sheet, which is supported by a solid pan-African franchise, and strong local-currency liquidity buffers. These strengths are counterbalanced by UBA’s rising, although still moderate, dependence on confidence-sensitive funding.

Sterling Bank Plc

The negative outlook reflects the negative outlook on Nigeria’s government issuer rating, affecting the bank’s credit profile as well as resulting in a lower ability to support the b3 BCA. Sterling has a large exposure to government debt securities and loans at 275 percent of its tangible common equity as of June 2019. Sterling will likely be more exposed to negative pressure on its revenue generation capacity and its asset risk than its top-tier local peers due to its relatively small size and client base. Sterling’s local currency deposit rating is B2 while the local currency national scale rating is A2.ng.

Sterling’s b3 BCA reflects its (1) vulnerabilities in its asset quality because of high single-name and sector concentration risks; and (2) modest capital levels, especially in light of high asset risks and high foreign-currency loans. These challenges are balanced against the bank’s deposit-based funding profile and stable local-currency liquidity.

Zenith Bank Plc

The negative outlook reflects the negative outlook on Nigeria’s government issuer rating. Zenith has a large exposure to government debt securities and loans at 232 percent of its tangible common equity as of June 2019. Zenith’s local currency deposit rating is B2 while the local currency national scale rating is Aa3.ng.

Zenith’s BCA of b2 reflects the bank’s (1) resilient earnings generating capacity and robust capital buffers, which together provide a buffer to withstand asset-quality deterioration; (2) high liquidity buffers and a predominantly deposit-funded balance sheet; and (3) robust franchise, which allows it to attract inexpensive deposits, relative to other Nigerian banks. These strengths are moderated by the bank’s high proportion of more confidence-sensitive corporate deposits versus retail deposit.