THUR 28 JAN, 2021-theGBJournal- Fitch Ratings has assigned Ecobank Nigeria Limited (ENG) a Long-Term Issuer Default Rating (IDR) of ‘B-‘ with a Stable Outlook, Viability Rating (VR) of ‘b-‘ and National Long-Term Rating of ‘BBB (nga)’.
The rating agency said ENG’s IDRs are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR).
‘’The VR reflects the constraint of Nigeria’s challenging operating environment, the bank’s very high impaired loan ratio, weak profitability and modest core capital buffers. This is balanced by company profile strengths as well as a solid funding profile and good foreign-currency liquidity, which is enhanced by prudent liquidity management by the Ecobank group.’’
According to Fitch, ‘’the Stable Outlook on ENG’s Long-Term IDR reflects our view that the bank has sufficient headroom at its current rating to absorb moderate shocks from sustained downside risks to the operating environment, the heightened level of risk in doing banking business in Nigeria and the ensuing risks to its financial performance (particularly asset quality) over the next 12-18 months. The Stable Outlook also reflects our expectations that capitalisation will remain resilient over this period with the bank maintaining adequate buffers over the minimum regulatory requirements.’’
The VR benefits from ENG’s company profile strengths of being part of the leading pan-African Ecobank group. ENG is a 100% owned subsidiary of Ecobank Transnational Incorporated (ETI; B-/Stable). ETI is a regional bank holding company with fully-fledged banking subsidiaries in 33 African countries (collectively the group).
The group also has a banking license in France and representative offices in Addis Ababa, Johannesburg, Beijing, London, and Dubai. The group’s operations are highly integrated, with all entities connected to a common operating platform and risk management framework, and common branding.
ENG is a material subsidiary for ETI, and its largest single entity, contributing to 23% of group assets at end-9M20. ETI continues to implement a turnaround strategy at ENG, having deleveraged and de-risked the bank in recent years, although it returned to growth in 2020 and plans above-sector-average loan growth in the medium term. Management quality is a relative strength with ETI appointing experienced bankers to ENG’s senior team.
‘’Asset quality is the key rating weakness,’’ Fitch said.
ENG’s impaired (IFRS 9 Stage 3) loans ratio stood at 21.7% at end-9M20, (end-2019: 23.9%), the highest among banks under our coverage in Nigeria, mainly reflecting disproportionally high exposure to the oil and gas sector (end-9M20: 40% of gross loans), albeit mainly originated before the 2014 oil price crash, as well as low loan growth between end-2015 and end-2019. Around 22% of the bank’s oil and gas exposures were impaired and more than half were problematic (in stage 2 or stage 3) at end-9M20.
‘’Our baseline scenario is that ENG’s stage 3 loan ratio is unlikely to worsen substantially in 2021, due to recoveries, write-offs and restructuring, moderate new impaired loan generation, and loan growth against an improving macro backdrop. At end-9M20, stage 3 loans were concentrated on two large exposures (equal to 40% of the total), which ENG expects to restructure in 2021. This would result in the stage 3 loan ratio declining to around 15% (still above the current sector average). However, the resolution of these two large exposures remains contingent on external factors, in our view.
At end-9M20, the proportion of loans subject to Covid-19 debt relief was relatively high, ‘’but our expectation is that the majority of this book will not turn impaired when measures expire as it will be supported by a gradual recovery in oil prices and economic activity.’’
Loan loss allowance coverage of stage 3 loans was a low 50% at end-9M20, as the bank benefits from high collateral coverage of its oil and gas exposures. Consequently, and given our expectation of fairly flat stage 3 loans, we do not expect a material increase in loan impairment charges (LICs) in 2021 that would hamper profitability.
‘’We expect ENG to remain profitable in 2021, although its performance metrics will continue to lag peers. Fitch’s core metric of operating profit/total risk-weighted assets (RWAs) was a very low 0.9% in 9M20. However, we expect better operating income generation with resumed loan growth, particularly in SME finance, together with strong expansion in transaction banking and a continuing fall in the cost of funding.’’
Nonetheless, weak operating efficiency continues to weigh on the bank’s performance, as reflected in its cost to income ratio of 77.4% in 9M20, albeit down from 95.9% in 2019 following two years of especially weak revenue generation. The bank has partly addressed its high cost base through network rationalisation and a greater focus on alternative delivery channels. Contained LICs on the back of recoveries and high collateral coverage should also support a gradual recovery in profitability.
ENG’s Tier 1 capital ratio of 13.5% and total capital adequacy ratio (CAR) of 15.3% at end-9M20 are comparatively weaker than peers, reflecting mainly weak internal capital generation. However, the CAR has a good buffer over the 10% regulatory minimum.
ENG’s capitalisation has been supported by zero dividend pay-outs since 2016 and a series of capital injections from ETI since 2014 totalling about USD450 million. Barring any material asset quality shocks, and with the turnaround in the business and higher earnings retention, we expect ENG’s CAR to gradually improve to within ENG’s guided range of 15%-18% in 2021. However, at the same time capital encumbrance is high with net impaired loans representing 38% of Fitch core capital (FCC) at end-9M20, leaving core capital exposed to asset quality shocks beyond our baseline scenario.
ENG has a solid funding profile, with low-cost current and savings accounts reaching 58% of total deposits at end-9M20 helping the bank to reduce its cost of funding. It has achieved good deposit growth through the expansion of digital channels and its financial inclusion initiatives. Retail and SME deposits accounted for 58% of total customer deposits at end-9M20, which results in reasonable deposit concentration, with the top 20 customer deposits representing 29% of the total.
We view ENG’s liquidity management as prudent with contingency plans in place. Local-currency liquidity is underpinned by a high share of liquid assets (cash, interbank placements and sovereign securities) representing more than 50% of total assets at end-9M20. ENG’s foreign-currency funding benefits from sizeable interbank deposits, which represented about 15% of total funding at end-9M20. More than half of these deposits (about USD400 million) came from ETI’s affiliates at end-9M20. This reflects the group’s well-established inter-affiliate short-term deposit placement programme (IAP), amounting to USD650 million at end-1H20, which provides ENG with a significant competitive advantage compared with most other Nigerian banks, as ENG is able to rely on IAP funding when foreign-currency liquidity conditions temporarily tighten in Nigeria.