Fitch Rates Ecobank Nigeria at ‘B-‘; Outlook Stable

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Fitch Ratings has assigned Ecobank Nigeria Limited (ENG) a Long-Term Issuer Default Rating (IDR) of ‘B-‘ with a Stable Outlook, Viability Rating (VR) of ‘b-‘ and National Long-Term Rating of ‘BBB (nga)’.

A full list of ratings is below.

KEY RATING DRIVERS

IDRS and VR

ENG’s IDRs are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR). The VR reflects the constraint of Nigeria’s challenging operating environment, the bank’s very high impaired loan ratio, weak profitability and modest core capital buffers.

This is balanced by company profile strengths as well as a solid funding profile and good foreign-currency liquidity, which is enhanced by prudent liquidity management by the Ecobank group.

Ecobank Group Empowers Women Businesses through Ellevate, its new women-focused programme

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The Stable Outlook on ENG’s Long-Term IDR reflects our view that the bank has sufficient headroom at its current rating to absorb moderate shocks from sustained downside risks to the operating environment, the heightened level of risk in doing banking business in Nigeria and the ensuing risks to its financial performance (particularly asset quality) over the next 12-18 months.

The Stable Outlook also reflects our expectations that capitalisation will remain resilient over this period with the bank maintaining adequate buffers over the minimum regulatory requirements.

The VR benefits from ENG’s company profile strengths of being part of the leading pan-African Ecobank group. ENG is a 100% owned subsidiary of Ecobank Transnational Incorporated (ETI; B-/Stable). ETI is a regional bank holding company with fully-fledged banking subsidiaries in 33 African countries (collectively the group).

The group also has a banking license in France and representative offices in Addis Ababa, Johannesburg, Beijing, London, and Dubai. The group’s operations are highly integrated, with all entities connected to a common operating platform and risk management framework, and common branding.

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ENG is a material subsidiary for ETI, and its largest single entity, contributing to 23% of group assets at end-9M20. ETI continues to implement a turnaround strategy at ENG, having deleveraged and de-risked the bank in recent years, although it returned to growth in 2020 and plans above-sector-average loan growth in the medium term. Management quality is a relative strength with ETI appointing experienced bankers to ENG’s senior team.

Asset quality is the key rating weakness. ENG’s impaired (IFRS 9 Stage 3) loans ratio stood at 21.7% at end-9M20, (end-2019: 23.9%), the highest among banks under our coverage in Nigeria, mainly reflecting disproportionally high exposure to the oil and gas sector (end-9M20: 40% of gross loans), albeit mainly originated before the 2014 oil price crash, as well as low loan growth between end-2015 and end-2019.

Around 22% of the bank’s oil and gas exposures were impaired and more than half were problematic (in stage 2 or stage 3) at end-9M20.

Our baseline scenario is that ENG’s stage 3 loan ratio is unlikely to worsen substantially in 2021, due to recoveries, write-offs and restructuring, moderate new impaired loan generation, and loan growth against an improving macro backdrop. At end-9M20, stage 3 loans were concentrated on two large exposures (equal to 40% of the total), which ENG expects to restructure in 2021.

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This would result in the stage 3 loan ratio declining to around 15% (still above the current sector average). However, the resolution of these two large exposures remains contingent on external factors, in our view.

At end-9M20, the proportion of loans subject to Covid-19 debt relief was relatively high, but our expectation is that the majority of this book will not turn impaired when measures expire as it will be supported by a gradual recovery in oil prices and economic activity.

Loan loss allowance coverage of stage 3 loans was a low 50% at end-9M20, as the bank benefits from high collateral coverage of its oil and gas exposures. Consequently, and given our expectation of fairly flat stage 3 loans, we do not expect a material increase in loan impairment charges (LICs) in 2021 that would hamper profitability.

We expect ENG to remain profitable in 2021, although its performance metrics will continue to lag peers. Fitch’s core metric of operating profit/total risk-weighted assets (RWAs) was a very low 0.9% in 9M20. However, we expect better-operating income generation with resumed loan growth, particularly in SME finance, together with strong expansion in transaction banking and a continuing fall in the cost of funding.

Nonetheless, weak operating efficiency continues to weigh on the bank’s performance, as reflected in its cost to income ratio of 77.4% in 9M20, albeit down from 95.9% in 2019 following two years of, especially weak revenue generation.

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The bank has partly addressed its high-cost base through network rationalisation and a greater focus on alternative delivery channels. Contained LICs on the back of recoveries and high collateral coverage should also support a gradual recovery in profitability.

ENG’s Tier 1 capital ratio of 13.5% and total capital adequacy ratio (CAR) of 15.3% at end-9M20 are comparatively weaker than peers, reflecting mainly weak internal capital generation. However, the CAR has a good buffer over the 10% regulatory minimum.

ENG’s capitalisation has been supported by zero dividend pay-outs since 2016 and a series of capital injections from ETI since 2014 totalling about USD450 million. Barring any material asset quality shocks, and with the turnaround in the business and higher earnings retention, we expect ENG’s CAR to gradually improve to within ENG’s guided range of 15%-18% in 2021.

However, at the same time capital encumbrance is high with net impaired loans representing 38% of Fitch core capital (FCC) at end-9M20, leaving core capital exposed to asset quality shocks beyond our baseline scenario.

ENG has a solid funding profile, with low-cost current and savings accounts reaching 58% of total deposits at end-9M20 helping the bank to reduce its cost of funding. It has achieved good deposit growth through the expansion of digital channels and its financial inclusion initiatives. Retail and SME deposits accounted for 58% of total customer deposits at end-9M20, which results in reasonable deposit concentration, with the top 20 customer deposits representing 29% of the total.

We view ENG’s liquidity management as prudent with contingency plans in place. Local-currency liquidity is underpinned by a high share of liquid assets (cash, interbank placements and sovereign securities) representing more than 50% of total assets at end-9M20.

ENG’s foreign-currency funding benefits from sizeable interbank deposits, which represented about 15% of total funding at end-9M20. More than half of these deposits (about USD400 million) came from ETI’s affiliates at end-9M20.

This reflects the group’s well-established inter-affiliate short-term deposit placement programme (IAP), amounting to USD650 million at end-1H20, which provides ENG with a significant competitive advantage compared with most other Nigerian banks, as ENG is able to rely on IAP funding when foreign-currency liquidity conditions temporarily tighten in Nigeria.

SUPPORT RATING

Fitch’s view of institutional support considers ETI’s high propensity to support ENG if required. This reflects ETI’s 100% stake in ENG, ENG’s role within the group, a high level of management and operational integration, reputational risks and common branding.

Nevertheless, we consider that support from ETI, while possible, cannot be relied upon given ENG’s relatively large size meaning required capital support could be excessive relative to ETI’s ability to provide it.

NATIONAL RATINGS

ENG’s National Ratings reflect its creditworthiness relative to other issuers in Nigeria and are driven by its standalone strength, reflecting its company profile strengths as well as solid funding and liquidity profile, underpinned by ordinary foreign currency liquidity support from the group.

The National Ratings are lower than the highest rated Nigerian peers due to ENG’s comparatively weaker asset quality, profitability and capitalisation metrics.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Rating upside is limited at present given the bank’s high impaired loan ratio and, consequently, pressures on other financial factors.

Rating upside is contingent on a material improvement in operating income and profitability, with performance metrics more akin to the larger banks in Nigeria. This will depend on volume growth and a sustained improvement in asset quality.

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Factors that could, individually or collectively, lead to negative rating action/downgrade:

A sharp increase in the bank’s net impaired loans/FCC ratio, closer to its recent peak of around 50%, or a drop in the bank’s FCC ratio below 10%.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.

The complete span of best- and worst-case scenario credit ratings for all rating categories range from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.

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Fitch Rates Ecobank Nigeria at 'B-'; Outlook Stable - Brand SpurFitch Rates Ecobank Nigeria at 'B-'; Outlook Stable - Brand Spur

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Fitch Rates Ecobank Nigeria at 'B-'; Outlook Stable - Brand SpurFitch Rates Ecobank Nigeria at 'B-'; Outlook Stable - Brand Spur

Latest News

Vivocom’s Group Game Changer – Multi-Billion Sand Project Secured

  • Initial contract worth RM3.79 billion for three years
  • Aspires to be a major industry player 'with exponential growth prospects'


KUALA LUMPUR, MALAYSIA - Media OutReach - 26 February 2021 - In a filing to Bursa Malaysia this evening, Vivocom Intl Holdings Berhad ('Vivocom') announced that V Development Group via one of its subsidiaries has secured a 'massive win' worth approximately USD934.7 million or the equivalent of RM3.79 billion.

Rain International Sdn Bhd ('Rain International') is a 97% owned subsidiary under the V Development Group which was recently merged into the Vivocom Group. The Company's proposed acquisition of V Development Group had been recently approved by the relevant authorities.

Rain International is principally involved in the mineral trading and exportation business, supplying sand to its client mainly in Hong Kong and China for reclamation and construction works. The Company had recently signed a contract for the supply of marine sand for a minimum period of three years.

The contract is for the supply of sand to Zhen Hua Engineering Company Ltd-China Communications Construction Company Ltd-CCCC Dredging (Group) Company Ltd. (ZHEC-CCCC-CDC), a Joint Venture contractor appointed to undertake the main reclamation works for the Hong Kong International Airport Three Runway System Project.

Director Mr William Chan Ching-Kee said: "As the appointed agent for the ZHECC-CCCC-CDC Joint Venture, we are looking forward to the exportation of sand from Malaysia to our client in Hong Kong to commence without any further delay."

Dato Seri Chia is optimistic that the contract would be extended for another two to three years and could potentially generate revenue of up to RM6 billion.

"The sand business is a major boost because it gives us tremendous visibility. The potential revenue is huge, recurring and highly scalable," its jubilant CEO, Dato Seri Chia Kok Teong exclaimed.

"The potential for explosive growth in the sand business is real and tangible, and bodes well for the Group in the next few years."

"We are starting with 3 years but the contract can easily be increased to 5 years and beyond, with higher tonnage shipped every 6 months. The exportation of sand will increase sharply over time," he added.

Besides the reclamation works for the Hong Kong International Airport, the rapid pace of construction and reclamation works in China and Singapore also requires heavy demand for sand, which is a considerable boon to Malaysia.

"The market for sand export is extremely humongous and will fuel the Group's rapid growth for the next several years. The RM3.79 billion Win is the first of many more to come."

"I have in fact urged my team to secure up to RM10 billion worth of sand contracts by the end of 2021. This is part of our overall transformation strategy to become a multi billions conglomerate," declared Dato Seri Chia.

"It is our core strategy to strengthen and diversify the Group's revenues generation capabilities and capacities and not be too narrowly focussed."

"Presently, we are already in negotiations for another RM2 to RM3 billion sand contract. Once finalised, we will make the relevant announcement as per Bursa Malaysia's requirements," Dato Seri Chia elaborated.

The sand would be procured from an approved permit holder to export sand overseas, and sourced from concession areas in Sandakan and Sungai Beluran in Sabah and throughout Malaysia.

"Even with this massive sand contract already secured, we will not be complacent. I have earlier promised to transform Vivocom into a behemoth Conglomerate and I will work non-stop to deliver on the promise," Dato Seri assured.

Since Dato Seri Chia's entry into Vivocom in January 2020 when its price was at 15 cents, the share has climbed sharply and last closed at RM1.06 on Thursday, 25th February 2021.

"I am very optimistic that Vivocom shares will continue to grow strongly and be worth a lot more than presently over time. I'm proud to say that we are no longer a penny stock," he reflected.

"My team is totally committed to building Vivocom into a reputable and profitable public company, one with solid fundamentals, sustainable profits and healthy cashflows."

"As a priority, we will work towards getting the Group elevated to the Main Board of Bursa Malaysia and be a dividends-paying company soonest possible," quipped Dato Seri.

To show his commitment, Dato Seri Chia has undertaken a voluntary self--imposed moratorium (or SIM) in that he will not dispose his personal stakes in Vivocom for the next 3 years. This will ensure the company's long-term price stability and sustainability.

"We want a stable and strong share price so that the Company can use its shares with its high liquidity as a currency for M&A activities to fund and fast-track expansion and growth," he explained.

"A strong share with high liquidity is a most valuable and prized asset. We will use it to buy Companies with game-changing and disruptive strategies. To look for the Next Big Thing."

"The enormous followings in the Company are what is driving in tremendous liquidity and momentum giving our share price added impetus," Dato Seri proudly asserts.

"We aspire to emulate Berkshire Hathaway strategy started over 40 years ago by Mr Warren Buffet. Mr Masayoshi Son built SoftBank Group of Japan along the same philosophy and Alphabet in US adopted similar strategies."

"These three companies are presently amongst the most valuable and admired companies in the world. I have the same dream for Vivocom. I am determined to leave behind an enduring legacy for all our valued shareholders," concluded Dato Seri Chia.

Fitch Rates Ecobank Nigeria at 'B-'; Outlook Stable - Brand Spur
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