Moody’s downgrades eight Nigerian banks following downgrade of government bond rating


By Moody's | Third Party Partner Press Release November 14, 2017

Moody’s Investors Service (Moody’s) has today downgraded to B2 from B1 the long-term local currency deposit and issuer ratings of four Nigerian banks — Access Bank Plc (Access), Guaranty Trust Bank Plc (GTBank), United Bank for Africa Plc (UBA) and Zenith Bank Plc (Zenith) and the long-term local and foreign currency issuer ratings of Bank of Industry, a Nigerian development bank. Moody’s also downgraded to B3 from B2 the long-term foreign currency deposit ratings of Access, GTBank, UBA and Zenith, as well as those of Union Bank of Nigeria plc (Union), First Bank of Nigeria Limited (FBN) and Sterling Bank Plc (Sterling). Concurrently, Moody’s downgraded the baseline credit assessments (BCAs) of Zenith and GTBank to b2 from b1.

Today’s rating action follows Moody’s downgrade of Nigeria’s government bond ratings to B2, with a stable outlook, from B1, with stable outlook, on 7 November 2017 (see press release: Moody’s downgrades Nigeria’s sovereign issuer ratings to B2 with a stable outlook; https://www.moodys.com/research/–PR_374801) and reflects (1) the government’s reduced capacity to provide support to Nigerian banks in times of stress and (2) the banks’ significant holdings of government securities linking their credit profiles to that of the government. The decision to downgrade banks’ long-term foreign currency deposit ratings follows the downgrade of the relevant country ceiling for foreign currency deposits to B3 from B2.

Ratings Rationale

Impact of Government Support on Banks’ Local Currency Deposit Ratings

The primary driver of today’s rating action is the weaker capacity of the government to provide support to banks, in case of stress, as reflected in the downgrade of the sovereign issuer rating to B2 from B1. Subsequently, Access’ and UBA’s long-term local currency deposit ratings and Bank of Industry’s long-term issuer ratings no longer benefit from a one-notch uplift from their b2 BCAs (or standalone credit profile, as is the case for Bank of Industry) as these are now at the same level as the government bond rating. The long-term local currency deposit ratings of Sterling, Union and FBN have been affirmed at B2, as their b3 BCAs continue benefiting from one notch of government support uplift.

Weaker Credit Profile of the Nigerian Government Exerts Pressure on Banks

The secondary driver of today’s rating action is the Nigerian banks’ significant holdings of government securities, which generally exceed 100% of their core capital, linking their credit profile to that of the government. In view of the correlation between sovereign and bank credit risk, the banks’ standalone credit profiles and ratings are constrained by the rating of the government. As a result, the BCAs for Zenith and GTBank have been downgraded to b2 from b1, in line with the downgrade of the government issuer rating, despite the resilient financial performance witnessed by both banks over the last 24 months. The BCAs of the other rated Nigerian banks have been affirmed as they already capture risks emanating from their sovereign exposures.

Individual Banks’ Main Rating Drivers

Union Bank of Nigeria plc

Moody’s has today affirmed Union Bank’s BCA and adjusted BCA at b3, long-term local currency deposit rating at B2, local and foreign currency issuer ratings at B2 and global scale short-term deposit and issuer ratings at Not-Prime. Concurrently, Moody’s has downgraded Union’s long term foreign currency deposit rating to B3 from B2, the long-term Counterparty Risk Assessment (CR Assessment) to B2(cr) from B1(cr), long term local currency national scale deposit ratings to A2.ng from Aa3.ng and foreign currency national scale deposit ratings to A3.ng/NG-2 from A1.ng/NG-1. The outlook on all long-term deposit and issuer ratings remains stable.

The affirmations reflect (1) Moody’s expectation of robust levels of tangible common equity over the next 12 to 18 months, following recent completion of a rights issue and (2) a stable deposit-based funding structure and moderate local currency liquidity buffers. These strengths are balanced against (3) elevated credit risks on the back of single-name and sector concentration risks and (4) relatively modest profitability levels versus larger local peers. The local currency deposit and issuer ratings also continue to incorporate one notch uplift from the bank’s b3 BCA based on our assessment of a high probability of government support in case of need.

The decision to downgrade the long term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2, follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. Similarly, the downgrade of the bank’s long-term CR Assessment reflects the government’s reduced capacity to provide support in case of need. As a result, the CR Assessment, which is positioned one notch above the adjusted BCA of b3, reflecting Moody’s view that its probability of default is lower than that of deposits, no longer benefits from government support uplift. The downgrade of the local currency deposit national scale rating (NSR) is a result of the repositioning of our relative ranking of Nigerian banks within our NSR map following the downgrade of the corresponding local currency deposit global scale rating.

First Bank of Nigeria Limited

Moody’s has today affirmed FBN’s BCA and adjusted BCA at b3, long-term local currency deposit rating at B2, local and foreign currency issuer ratings at B2, short-term global scale deposit and issuer ratings at Not-Prime, and local currency national scale ratings at A2.ng/NG-1. Concurrently, Moody’s has downgraded the bank’s long term foreign currency deposit rating to B3 from B2, foreign currency national scale ratings to A3.ng/NG-2 from A2.ng/NG-1, and long-term CR Assessment to B2(cr) from B1(cr). The outlook on the deposit and issuer ratings remains negative.

The affirmations reflect (1) FBN’s still weak asset risk metrics, with non-performing loans (NPLs) estimated at over 20% of gross loans as of June 2017, albeit on a declining trend, (2) still tight – although improving – foreign currency liquidity, counterbalanced by (3) the bank’s resilient pre-provision profitability — with FBN’s pre-provision profits at 3.9% of average total assets — and an equity-to-assets ratio of 11.7% as of June 2017 and (4) a stable deposit-based funding structure and strong local currency liquidity buffers. The local currency deposit and issuer ratings also continue to incorporate one notch uplift from the bank’s b3 BCA based on our assessment of a high probability of government support in case of need.

The decision to downgrade the long term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2 follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. Similarly, the downgrade of the bank’s long-term CR Assessment reflects the government’s weakened capacity to provide support in case of need. As a result, the CR Assessment, which is positioned one notch above the adjusted BCA of b3, reflecting Moody’s view that its probability of default is lower than that of deposits, no longer benefits from an additional notch of government support uplift.

Access Bank Plc

Moody’s has today affirmed the BCA and adjusted BCA of Access at b2, long-term CR Assessment at B1(cr) and global scale short-term deposit and issuer ratings at Not-Prime. Concurrently, Moody’s has downgraded Access’ long-term local currency deposit rating to B2 from B1, long term foreign currency deposit rating to B3 from B2, long-term local and foreign currency issuer ratings to B2 from B1, long term local currency national scale deposit ratings to A1.ng from Aa2.ng and foreign currency national scale deposit ratings to A3.ng/NG-2 from Aa3.ng/NG-1. The outlook on all long-term deposit and issuer ratings remains stable.

The affirmation of the bank’s BCA reflects its strong asset quality metrics and robust loan underwriting standards and risk management processes, large local currency liquidity buffers, and resilient capital buffers. These strengths are balanced against concentration risks in the bank’s loan book, including its exposure to loans denominated in foreign currency.

The downgrades are primarily driven by the rating agency’s view that the government’s capacity to provide support for Nigerian banks in times of stress has weakened as indicated by Moody’s recent downgrade of Nigeria’s government bond ratings to B2 stable from B1 stable. The decision to downgrade the long term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2, follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. The downgrade of the local currency deposit NSR is a result of the repositioning of our relative ranking of Nigerian banks within our NSR map following the downgrade of the corresponding local currency deposit global scale rating.

Guaranty Trust Bank Plc

Moody’s has today downgraded GTBank’s BCA and adjusted BCA to b2 from b1, long-term local currency deposit rating to B2 from B1, long term foreign currency deposit rating to B3 from B2, long-term local and foreign currency issuer ratings to B2 from B1, long term local currency national scale deposit ratings to Aa3.ng from Aa1.ng, foreign currency national scale deposit ratings to A3.ng/NG-2 from Aa3.ng/NG-1 and long-term CR Assessment to B1(cr) from Ba3(cr). The Aa3.ng/NG-1 local currency deposit national scale rating (NSR) now represents the highest attainable NSR rating in Nigeria. The global scale short-term deposit and issuer ratings were affirmed at Not-Prime. The outlook on all long-term deposit and issuer ratings remains stable.

The downgrades are primarily driven by the bank’s high exposure to government securities that link the bank’s credit profile to that of the government. The decision to downgrade the long term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2, follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. The downgrade of the local currency deposit NSR is a result of the repositioning of our relative ranking of Nigerian banks within our NSR map following the downgrade of the corresponding local currency deposit global scale rating.

GTBank’s ratings reflect (1) the bank’s resilient earnings generation capacity and robust capital buffers, which together provide a relatively thick cushion to withstand asset quality deterioration compared with domestic peers, (2) the bank’s high liquidity buffers and a predominantly deposit funded balance sheet, and (3) the bank’s robust franchise, which allows it to attract inexpensive deposits and to lend to high credit quality borrowers (relative to other Nigerian banks), resulting in relatively strong asset quality metrics and low credit costs.

Sterling Bank Plc

Moody’s has today affirmed the BCA and adjusted BCA of Sterling at b3, long-term local currency deposit rating at B2, local and foreign currency issuer ratings at B2 and global scale short-term deposit and issuer ratings at Not-Prime. Concurrently, Moody’s has downgraded the long term foreign currency deposit rating to B3 from B2, long-term CR Assessment to B2(cr) from B1(cr), long term local currency national scale deposit ratings to A2.ng from A1.ng and foreign currency national scale deposit ratings to A3.ng/NG-2 from A2.ng/NG-1. The outlook on all long-term deposit and issuer ratings remains stable.

The affirmations reflect (1) Sterling’s resilient deposit funded balance sheet and stable local currency liquidity balanced against, (2) the bank’s low foreign currency liquidity buffers, and (3) vulnerabilities in asset quality on account of high single-name and sector concentration risks. The local currency deposit and issuer ratings also continue to incorporate one notch uplift from the bank’s b3 BCA based on our assessment of a high probability of government support in case of need.

The decision to downgrade the long term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2, follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. Similarly, the downgrade of the bank’s long-term CR Assessment reflects the government’s reduced capacity to provide support in case of need. As a result, the CR Assessment, which is positioned one notch above the adjusted BCA of b3 reflecting Moody’s view that its probability of default is lower than that of deposits, no longer benefits from government support uplift. The downgrade of the local currency deposit NSR is a result of the repositioning of our relative ranking of Nigerian banks within our NSR map following the downgrade of the corresponding local currency deposit global scale rating.

United Bank for Africa Plc (UBA)

Moody’s has today affirmed UBA’s BCA and adjusted BCA at b2, long-term CR Assessment at B1(cr) and global scale short-term deposit and issuer ratings at Not-Prime. Concurrently, Moody’s has downgraded UBA’s long-term local currency deposit rating to B2 from B1, long term foreign currency deposit rating to B3 from B2, long-term local and foreign currency issuer ratings to B2 from B1, long term local currency national scale deposit ratings to A1.ng from Aa2.ng and foreign currency national scale deposit ratings to A3.ng/NG-2 from Aa3.ng/NG-1. The outlook on all long-term deposit and issuer ratings remains stable.

The affirmations reflect (1) the bank’s resilient asset quality profile, which is more geographically diversified than most of its peers and (2) then bank’s predominantly deposit funded balance sheet, which is supported by a solid pan-African franchise.

The downgrades are primarily driven by Moody’s view that the government’s capacity to provide support for Nigerian banks in times of stress has weakened as indicated by Moody’s recent downgrade of Nigeria’s government bond ratings to B2 stable from B1 stable. The decision to downgrade the long term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2, follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. The downgrade of the local currency deposit NSR is a result of the repositioning of our relative ranking of Nigerian banks within our NSR map following the downgrade of the corresponding local currency deposit global scale rating.

Zenith Bank Plc

Moody’s has today downgraded Zenith’s BCA and adjusted BCA to b2 from b1, long-term local currency deposit rating to B2 from B1, long term foreign currency deposit rating to B3 from B2, long-term local and foreign currency issuer ratings to B2 from B1, long term local currency national scale deposit ratings to Aa3.ng from Aaa.ng, foreign currency national scale deposit ratings to A3.ng/NG-2 from Aa3.ng/NG-1, long-term CR Assessment to B1(cr) from Ba3(cr). The Aa3.ng/NG-1 local currency deposit NSR now represents the highest attainable NSR rating in Nigeria. The global scale short-term deposit and issuer ratings were affirmed at Not-Prime. The outlook on all long-term deposit and issuer ratings remains stable.

The downgrades are primarily driven by the bank’s high exposure to government securities that links the bank’s credit profile to that of the government. The decision to downgrade the long term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2, follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. The downgrade of the local currency deposit NSR is a result of the repositioning of our relative ranking of Nigerian banks within our NSR map following the downgrade of the corresponding local currency deposit global scale rating.

Zenith’s ratings reflect (1) the bank’s resilient earnings generating capacity and robust capital buffers, which together provide a cushion to withstand asset quality deterioration, (2) the bank’s high liquidity buffers and a predominantly deposit funded balance sheet, and (3) the bank’s robust franchise, which allows it to attract inexpensive deposits and to lend to high credit quality borrowers (relative to other Nigerian banks), resulting in relatively strong asset quality metrics and low credit costs.

Bank of Industry

Moody’s has today downgraded Bank of Industry’s long-term local and foreign currency issuer ratings to B2 from B1 and its long term local and foreign currency national scale issuer ratings to Aa3.ng from Aa1.ng. The Aa3.ng/NG-1 national scale issuer rating now represents the highest attainable national scale rating (NSR) in Nigeria. All global scale short-term issuer ratings were affirmed at Not-Prime. The outlook on all long-term issuer ratings remains stable.

Bank of Industry’s b2 standalone profile remains unchanged and reflects (1) its robust capital buffers, with an equity to assets ratio of 34.0% as of June 2017, (2) a stable liability structure made up of long-term funding at concessional rates and (3) the tangible improvements to the bank’s risk positioning in recent years. These strengths are balanced against (4) our expectation that asset quality will be increasingly pressured given then bank’s higher risk exposure to the micro, small and medium-sized enterprises (MSMEs) segment, which exposes it to riskier assets.

The downgrades are primarily driven by Moody’s view that the government’s capacity to provide support for Nigerian banks in times of stress has weakened as indicated by Moody’s recent downgrade of Nigeria’s government bond ratings to B2 stable from B1 stable. The downgrade of the NSR is a result of the repositioning of the bank’s rating within our NSR map following the aforementioned downgrades of the corresponding global scale ratings.

What Could Move Ratings Up or Down?

A demonstrated ability to contain non-performing loans while maintaining solid core profitability and capital generation could put upward pressure on the banks’ BCAs or lead to a stabilisation in the outlook in the case of FBN. An upgrade of the banks’ global scale deposit and issuer ratings would be contingent on an improvement in the operating environment that translates to an upgrade of Nigeria’s sovereign rating.

The ratings could be downgraded in the event of a further downgrade of the sovereign and/or if we assess that the government’s willingness to provide support in the future will decline below our current assumptions. The ratings could also be downgraded if we anticipate that a deterioration in the macro environment poses downside risks for asset quality and/or the capital generation capacity of the banks beyond what is already assumed in the ratings.

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