London-29 October 2019: Fitch Ratings has affirmed Guaranty Trust Bank Plc’s (GTB) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with Stable Outlook and Viability Rating (VR) 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
GTB’s IDRs and National Ratings are driven by the bank’s intrinsic creditworthiness, as defined by its VR, the highest assigned by Fitch to a Nigerian bank. Like all Nigerian banks, GTB’s VR is constrained by the domestic operating environment where economic recovery is fragile and opportunities for sound credit growth are limited. The operating environment has a high influence on VR. The VR also considers GTB’s strong financial metrics and high-performance ratios, comfortable capital buffers and highly concentrated loan book.
GTB is one of Nigeria’s largest banks, controlling an overall domestic market share of approximately 11%. The experienced management team delivers especially strong performance metrics and GTB is the country’s most profitable bank. It consistently achieves an annual operating return on average assets in excess of 5%.
Strong earnings support capitalisation and capital adequacy is a rating strength. GTB’s Fitch Core Capital/risk-weighted assets ratio reached a high 26.7% at end-June 2019 and the bank’s internal target is to maintain regulatory capital ratios in excess of 17%, comfortably above the 15% prudential minimum required.
Asset quality ratios compare well with peers and efforts to recover impaired loans are proving successful. The impaired loans/total loans ratio is on a declining trend, improving to 6.8% at end-June 2019. Loan loss reserve coverage reached 80%, which appears adequate considering available collateral. GTB’s IFRS 9 Stage 2 loans were equivalent to approximately 11% of loans at end-June 2019, which is broadly in line with close peers.
Single borrower and sector concentrations are significant, as is common in Nigeria, exposing the bank to unexpected credit losses. At end-June 2019, the top 20 exposures were equivalent to approximately 47% of gross loans and around 40% of loans were extended to oil-related companies. Asset quality in the oil-related portfolio is sound, suggesting good underwriting standards. However, oil price trends can be volatile and the high level of concentration indicates a relatively high-risk appetite. Given this, we consider GTB’s efforts to boost loan loss reserve coverage as prudent. Loan loss reserves covered around 80% of impaired loans at end-June 2019 and management’s target is to increase this to 100% by end-2019.
GTB typically operates with a high net open US dollar structural position, but the market risk is well monitored and risk management tools are well developed. Relative exchange rate stability since 2017 reduced the impact of exchange rate fluctuations on profits and balance sheet ratios. GTB is positioned to benefit from naira depreciation as 40% of assets and 28% of liabilities were the US dollar-denominated at end-June 2019.
GTB’s balance sheet is liquid. Loan deleveraging continued in 1H19, while deposit inflows are still positive (up 6%). Excess liquidity continues to be invested in Nigerian government securities. Regulatory pressure to encourage banks to lend to the real economy may result in positive loan growth during 2H19. Liquidity management is sound in both foreign and local currency.
GTB’s National Ratings reflect its creditworthiness relative to the best credits in Nigeria.
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. In addition, there are no clear messages of support from the authorities regarding their willingness to support the banking system. Therefore, the Support Rating Floor for 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.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE RELEVANCE SCORES
The highest level of environmental, social and governance (ESG) credit relevance for GTB is a score of 3. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg.
IDRS, VIABILITY RATING, NATIONAL RATINGS AND SENIOR DEBT
GTB’s IDRs are sensitive to a rating action on its VR. GTB’s VR is primarily sensitive to our assessment of Nigeria’s operating environment because the bulk of its activities are concentrated in its home country and the correlations between the sovereign and banking sector are high. The Stable Outlook on the sovereign rating suggests changes are not expected over the rating horizon. The VR is also primarily sensitive to a material deterioration in asset quality. This could be triggered, for example, by oil price weakness. GTB’s National Ratings are sensitive to a change in its creditworthiness relative to other Nigerian banks. An upgrade of GTB’s IDRs would require an upgrade of the Nigerian sovereign rating.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating and the Support Rating Floor are sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank. Given Nigeria’s sovereign ratings, this is not our base case.
The rating actions are as follows:
Guaranty Trust Bank Plc
Long-Term IDR affirmed at ‘B+’; Outlook Stable
Short-Term IDR affirmed at ‘B’
Viability Rating affirmed at ‘b+’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘No Floor’
National Long-Term Rating affirmed at ‘AA(nga)’
National Short-Term Rating affirmed at ‘F1+(nga)’