Moody’s says Nigeria’s Sterling Bank’s credit profile likely to be resilient to downside risks

London, Capital Markets in Africa — Nigeria’s Sterling Bank Plc is likely to remain resilient to downside risks despite its rising problem loans, says Moody’s Investors Service in a report published today. Moody’s outlook on the bank is stable for the next 12-18 months.

“The bank reported 1H2015 results that show a continued upward trend in the bank’s non-performing loans (NPLs) and highlights vulnerabilities in the bank’s asset quality given its rapid loan growth in recent years and its large exposure to the oil and gas sector. Despite this trend, we expect Sterling’s overall credit profile to remain resilient over our outlook period given a number of mitigating factors that we believe will contain asset quality deterioration, hence our Stable outlook,” says Akintunde Majekodunmi, a Vice President at Moody’s.

While the bank’s problem loans are low compared to similarly rated banks globally, they are rising steadily — a trend likely to continue as low oil prices cut into corporate profits and consumer confidence. Non-performing loans rose to 3.2% of total loans in H1 2015 from 2.7% in 2014 and 1.8% in 2013. Moody’s expects Sterling’s NPLs to increase to mid-single digits over the next 12 to 18 months.

The bank’s rapid annual loan growth of 39% between 2010 and 2014 outpaced the system’s growth of 16.1% and has resulted in large numbers of untested new loans on the loan book. Also, over a third of the bank’s lending is to the stressed oil and gas sector (38% at the end of June 2015), compared to the banking system average of 24% (FY2014), leaving the loan book heavily exposed to oil price movements.

In Moody’s view, however, the bank is likely to remain resilient to these downside risks. Sterling’s loan-loss reserves, for example, amount to 102% of problem loans (H1 2015), significantly above the average for b3 to ba1 rated global peers of around 80% (2014).

“Given a provisioning coverage of greater than 100% we expect that profitability will adequately absorb our expectation of an increased cost of risk thus resulting in stable capital buffers over the coming quarters,” explains Majekodunmi.

“In addition, improvements in banking regulation, risk management functions and governance will further bolster the bank’s resilience to increasing problem loans, so we expect any deterioration in loan quality to be manageable,” continues Mr. Majekodunmi.

Other strengths include the bank’s predominantly deposit funded balance sheet with a low reliance on costlier and more sensitive market funds. As of H1 2015, deposits made up 86% of the bank’s funding sources compared to a system average of around 74%. The bank also has a high liquidity ratio which provides a thick cushion, with liquid assets to total tangible assets of 46% as of H1 2015 on account of a low loan-to-deposit ratio of 62%.

Additionally, though Moody’s views Sterling’s loss absorption capacity to be moderate, it expects the bank’s capital buffers to remain solid over the coming quarters.