Fitch Revises Nigerian Banks’ Outlook to Negative

Fitch Ratings yesterday revised its outlook on four Nigerian banks to negative from stable. The global rating agency also affirmed the long-term Issuer Default Ratings (IDRs) of 10 banks and financial institutions.

The affected institutions were Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc (UBA), Guaranty Trust Bank Plc (GTB), Access Bank Plc, Diamond Bank Plc, Fidelity Bank Plc, Union Bank Plc, First City Monument Bank Limited (FCMB), Wema Bank Plc and FBN Holdings Plc (FBNH).

But the National Ratings of Stanbic IBTC Bank Plc (SIBTC), as well as its bank holding company, Stanbic IBTC Holdings Plc (SIBTCH) were also affirmed.

Fitch also revised Bank of Industry Limited’s (BOI) Outlook to Negative from Stable, while affirming the Long-Term Issuer Default Rating of the bank at ‘B+’.

According to a statement by Fitch yesterday, the IDR Outlooks on Zenith and GTB (both at B+) was revised to negative following a recent similar action on Nigeria’s (B+) Outlook. The other two banks, whose Outlooks was also revised to Negative were Diamond and FBN/FBNH and the revision reflected their weaker financial profiles.

“We have downgraded the Long-and Short-Term National Ratings of FBN/FBNH and Diamond to ‘BB+(nga)’ and ‘B(nga)’ respectively to reflect heightened vulnerability of capital due to downside asset quality risks. A full list of rating actions is at the end of this rating action commentary. The IDRs of all the banks (except SIBTC/SIBTCH) are driven by Fitch’s assessment of their standalone creditworthiness as captured in their Viability Ratings (VRs).

“The IDRs are all in the ‘B’ range, indicating highly speculative fundamental credit quality, and factor in the banks’ weakened credit profiles due to challenging macro-economic conditions and market volatility. The operating environment continues to be affected by the oil price shock, slow GDP growth, continuing pressure on the naira, scarcity of hard currency in the FX interbank market and policy uncertainty.

“The VRs continue to be pressured by tight foreign currency liquidity, asset quality deterioration and limited capital buffers. The sector remains largely profitable, but operating profits in 2016 were inflated by foreign currency revaluation gains (due to the sharp depreciation of the naira in June 2016).

“Foreign currency-adjusted ‘normalised’ operating profit, although still healthy, is vulnerable to rising loan impairment charges (LICs). As a consequence, the banks VRs remain in the highly speculative ‘b’ range,”

The global rating agency said it is currently monitoring the banks’ ability to meet maturing external obligations given current difficult market conditions and limited supply of foreign currency from the Central Bank of Nigeria (CBN). The new foreign-exchange regime provided limited respite in accessing foreign currency in the interbank market.

FX forward contracts provided by the CBN since June 2016 have helped the banks access foreign currency to reduce a large backlog of overdue trade finance obligations. These were either extended or refinanced with international correspondent banks. Further depreciation of the naira against the US dollar would negatively impact banks’ regulatory capital ratios due to the translation effect of risk-weighted assets (RWAs).

“Some banks have limited buffers over regulatory minimums and further erosion of capital ratios beyond our expectations could be credit-negative. GTB and Zenith are the highest rated banks in Nigeria with LongTerm IDRs and VRs of ‘B+’ and ‘b+’ respectively. These ratings are driven by solid company profiles, management quality and strong through-the-cycle performance.

“The Negative Outlooks on their Long-Term IDRs reflect Fitch’s view that they cannot be rated above the sovereign due to the close correlation between the domestic operating environment and their credit profiles, including large holdings of government securities.

“UBA’s VR reflects the bank’s strong franchise and company profile, which includes a broad pan-African footprint, as well as healthy financial metrics, including adequate capital and leverage ratios and resilient earnings. Access’s VR reflects the bank’s expanding franchise and market share as well as a strengthened business model and good track-record of execution. The rating also considers the bank’s healthy financial profile, including strong asset quality and capital ratios.

“FBNH’s and FBN’s VRs reflect the group’s traditionally strong franchise and company profile in Nigeria and regionally and a large retail network. The VRs also factor in the bank’s very high non-performing loans (NPL) ratio, large loan concentrations to the oil sector and weak capital position. The Outlook on the Long-Term IDRs is revised to Negative to reflect continued pressure on capital as addressing its substantial asset quality problems will likely take time. Diamond’s VR reflects the bank’s high risk appetite and weaker earnings,” it added.