Fitch Downgrades 3 Nigerian Banks to ‘B’, Places All 10 Banks on

LAGOS (Capital Markets in Africa) – Fitch Ratings has downgraded the three-highest rated banks in Nigeria, Zenith Bank (Zenith), Guaranty Trust Bank (GTB) and United Bank for Africa (UBA), to Long-Term Issuer Default Rating (IDR) ‘B’ and Viability Rating (VR) ‘b’.

Fitch has also placed the Long-Term IDRs, VRs and National Ratings of all 10 rated Nigerian banks (excluding Stanbic IBTC Holdings (SIBTCH) and Stanbic IBTC Bank (SIBTC) – which are not assigned VRs and IDRs) on Rating Watch Negative (RWN).

A full list of rating actions is detailed below.

The RWN reflects our expectations that all Nigerian banks will face material pressures from a weaker operating environment over the next few months given the oil price crash, a potential further devaluation of the Nigerian naira and the impact of the COVID-19 pandemic on individuals and businesses. While the full extent is not yet known, it is our view that ‘b+’ VRs and ‘B+’ IDRs are no longer compatible with the deteriorated operating environment.

Even before the current crisis, Fitch’s sector outlook for the Nigerian banking sector was negative, which reflected tough operating conditions, including slow GDP growth, rising regulatory risks, and potential performance pressures. Fitch expects banks’ credit profiles to suffer from weaker asset quality and reduced profitability in the more severe downside scenario.

Based on experiences from 2015/2016, we expect the current oil price shock to adversely impact the oil and gas sector. This sector accounts for around 30% of the banking sector’s gross loans, of which a large proportion was restructured during the previous crisis (some are still classified as Stage 2 under IFRS 9). Our stress tests show that asset-quality risks arising from deterioration of the banks’ oil and gas exposures are the biggest threat to their ratings. Additionally, we expect the non-oil segment to be impacted by the slower economy, but also due to the COVID-19 crisis, which could severely affect communities and industries. It would particularly test the quality of consumer and SME loans.

Lower oil revenues also raise the prospect of a material naira devaluation, which would put pressure on the banks’ regulatory capital ratios. However, given the banks’ net long foreign-currency positions, our stress tests show that in most cases the impact on Fitch Core Capital (FCC) ratios is tolerable under several scenarios.

Nigerian banks have reasonable loss absorption buffers, underpinned by strengthened capitalisation since the last crisis in XX. In the near term healthy earnings will continue to absorb larger credit losses but future profits will be under pressure from slowing loan growth, reduced client activity and higher levels of provisioning for expected credit losses under the IFRS 9 accounting framework.

On balance, the near-term impact from the oil price shock and COVID-19 on funding and liquidity is likely to be tolerable. The primary risk is that lower oil revenues (and Nigeria’s falling FX reserves) could limit banks’ access to foreign currency (FC) liquidity. Furthermore, adverse global conditions could impede some banks in raising external financing. Local-currency liquidity remains strong with banks funded mainly by low-cost customer deposits.

The Central Bank of Nigeria (CBN) has announced relief measures, which should alleviate some near-term asset-quality pressures. These include requesting banks to restructure loan tenors and terms for consumers and businesses that are most affected, particularly borrowers in the oil and gas, agriculture and manufacturing sectors.

Fitch will resolve the RWN once it has assessed how this economic shock impacts the banking system and the credit profiles of each bank, as well as the banks’ ability to adapt. Fitch expects to resolve the RWNs in the next six months.

Key Rating Drivers
IDRs and VRs

The Long and Short-term IDRs of Nigerian banks are driven by their standalone credit profiles as determined by their VRs. Long-Term IDRs range from ‘B’ to ‘B-‘, reflecting Nigeria’s challenging and volatile operating environment, which highly influences the banks’ financial and non-financial rating factors.

Asset-quality metrics, which have improved over the last three years owing to restructuring, recoveries, and write-offs, are likely to deteriorate in 2020 due to the current shocks. This will also put increasing pressure on earnings, profitability, and capitalization. The risks to funding and liquidity are mainly from the disruption in FC liquidity.

SUPPORT RATINGS AND SUPPORT RATING FLOOR
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s (B+/Negative) weak ability to provide support, particularly in FC. Therefore, the Support Rating Floor (SRF) of all Nigerian banks is ‘No Floor’ and all Support Ratings (SRs) are ‘5’. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.

NATIONAL RATINGS
The National Ratings reflect the creditworthiness of the Nigerian banks relative to other issuers in Nigeria. The National Ratings of SIBTCH and SIBTC are the highest in Nigeria, reflecting our view of potential support from parent Standard Bank Group (BB+/Negative) if required. The RWN on the 10 other commercial banks’ National Ratings reflect our view that their standalone credit profiles are weakening in the current downturn.

SENIOR DEBT AND SUBORDINATED DEBT
Where applicable, senior debt issued by banks is rated at the same level as the bank’s IDRs (or the National Long-Term Rating for SIBTC) because in our view, the likelihood of default on these notes reflects that of the bank.

Following the publication of Fitch’s new Bank Rating Criteria on 28 February 2020, the agency has downgraded Access Bank’s NGN30 billion subordinated bonds to ‘A-(nga)’ from ‘A(nga)’, two notches below the bank’s National Long-Term Rating. This reflects the revised baseline notching for loss severity for this type of debt to two notches from one. Fitch has placed Access’ subordinated bonds on RWN, mirroring that on the bank’s Long-Term National Rating.

RATING SENSITIVITIES
VRs, IDRs, NATIONAL RATINGS AND DEBT RATINGS
Fitch will resolve the RWNs on the VRs and IDRs, and their National Ratings by analysing the impact on each bank’s overall credit profile, and in particular on asset quality, performance, capital and potentially liquidity and funding. We will also assess the timeliness and effectiveness of respective managements’ responses and adjustments in the banks’ strategies.

The resolution of the RWN will also factor in the extent of the deterioration in the operating environment, as reflected in particular by the performance of the overall economy, non-oil sector growth prospects and credit demand levels for the sector.

Nigerian banks’ ratings could remain at their current levels if Fitch believes the operating environment is still supportive of the current ratings, and in particular if asset quality holds up.

Given Nigeria’s Country Ceiling of ‘B+’, SIBTCH’s and SIBTC’s National Ratings could withstand up to a two-notch downgrade of SBG’s Long-Term FC IDR before they would be affected. Downside risk to the ratings could also stem from a decline in SBG’s willingness or ability to provide support, or from a change in SBG’s stake, resulting in a loss of control.

Public Ratings with Credit Linkage to other ratings

SIBTCH’s and SIBTC’s ratings are linked to the ratings of SBG.

ESG Considerations
ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.