London-29 October 2019: Fitch Ratings has affirmed Access Bank Plc’s (Access) Long-Term Issuer Default Rating (IDR) at ‘B’ with a Stable Outlook. The Viability Rating (VR) is also affirmed at ‘b’. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS, VR, NATIONAL RATINGS AND SENIOR DEBT RATINGS
The IDRs, National Ratings and senior debt ratings of Access are driven by its intrinsic creditworthiness, as defined by its VR. Like all Nigerian banks, Access’ VR is constrained by the operating environment in Nigeria, which has a high influence on the rating. Nigeria’s sovereign rating is ‘B+’ with Stable Outlook.
The acquisition of Diamond Bank (Diamond) on 31 March 2019 increased Access’ consolidated assets by around 30% and created Nigeria’s largest bank, with a 23% share of deposits (previously 11%). Following the acquisition, Access’ traditional corporate business model is more balanced across retail and SME segments. Management’s objectives are to pursue a retail-focused, digitally-driven, growth strategy and position the bank as a regional leader in Africa. If achieved, this will boost Access’ profile, but factors such as franchise, business model and strategic objectives currently have only a moderate influence on the bank’s ratings.
Diamond’s asset quality was weak but management is successfully executing on a plan to write off impaired loans and focus on recoveries. The impaired (Stage 3) loans/gross loans ratio, which had exceeded 10% immediately following Diamond’s acquisition, fell back to 6.8% at end-June 2019. This is broadly in line with ratios displayed by the most highly rated Nigerian banks (around 7%) but Access’ share of Stage 2 loans as a proportion of gross loans is still fairly high at around 20%. Total loan loss coverage of Stage 3 loans is high at 112% (49% immediately post-acquisition), but specific coverage of Stage 2 loans is still low.
Access’ risk culture is strong. The bank’s risk management tools, culture and controls are being implemented across the Diamond network, which we view positively but it will take time to assess whether asset quality problems at Diamond have been fully addressed.
Access’ Fitch Core Capital (FCC)/risk-weighted assets ratio, 18% at end-June 2019, is still below the 28% average reported by its closest peers. Access’ ability to generate earnings is considerable and regulatory capital ratios have been strengthened through subordinated debt issuance, but this is not included in our calculation of FCC.
Performance metrics achieved so far in 2019 are sound. Net interest margin improved to 7.3% in 1H19, largely as a result of lower funding costs reflecting the inflow of cheaper retail and SME deposits, which are proving to be stable. The bank’s cost-to-income ratio (65%) is still high compared with the 50% average reported by more efficient peers, but identified synergy savings are considerable and efficiency improvements should feed through over the next few years.
Access’ funding profile improved following the Diamond merger and the outlook for the bank’s funding and liquidity metrics is positive. Liquidity coverage for short-term liabilities in foreign currency and naira is prudent. Diamond’s USD200 million bond was repaid at end-May 2019 and Access redeemed USD400 million of subordinated notes in June 2019. Repayment of Access’ outstanding USD300 million Eurobond is not due until October 2021 and the bank’s foreign-currency liquidity position is comfortable, with US dollar cash and equivalents covering around 40% of foreign-currency deposits at end-June 2019.
Access’ National Ratings reflect the bank’s creditworthiness relative to other issuers in Nigeria.
Access’ NGN30 billion subordinated bonds are rated one notch below the bank’s National Long-Term Rating. This reflects higher loss-severity relative to senior unsecured instruments, reflecting their subordinated status. No additional notching is ascribed for non-performance risk as we regard this to be minimal relative to that captured by Access’ National Long-Term Rating.
SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s weak ability to provide support, particularly in foreign currency. The Support Rating Floor of all Nigerian banks is ‘No Floor’ and all Support Ratings 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.
IDRS, VR, NATIONAL RATINGS
Access’ IDRs are sensitive to a change in the bank’s VR. National Ratings are sensitive to changes in Access’ credit risk relative to other Nigerian issuers which, in turn, could also be sensitive to a change in the bank’s VR.
The upside for the VR is sensitive to asset quality trends. Should Access’ Stage 3/gross loans ratio stabilise or improve, and should the Stage 2/gross loans ratio become more in line with ratios displayed by more highly rated peers, an upgrade of the VR is possible. The VR could also be upgraded if the benefits of the Diamond merger feed through to sustainable sound profitability trends, boosting internal capital generation. The downside to the VR is not envisaged at present but a material deterioration in the operating environment would likely negatively impact the VR.
SENIOR AND SUBORDINATED DEBT
A change in Access’ IDRs would lead to a change in the ratings of the bank’s senior debt obligations. The subordinated bond’s rating is sensitive to changes in Access’ National Long-Term Rating.
ENVIRONMENT, SOCIAL AND GOVERNANCE SCORES
The highest level of environmental, social and governance (ESG) credit relevance for Access is a score of 3. This means ESG issues are credit-neutral or have only a minimal impact on the entity, either due to their nature or to the way in which they are being managed by the entity.