Moody’s Downgrades First Bank, Access Bank, GTB, others

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Things are not looking up for Nigerian banks in the International financial market, says the latest report from Moody’s.

Access Bank Plc, Guaranty Trust Bank Plc (GTB), First Bank of Nigeria Limited (FBN) and Union Bank of Nigeria Plc featured prominently in a statement issued by Moody’s Investors Service yesterday following its latest Global Credit Research.

Moody’s, a leading provider of credit ratings, research, and risk analysis, explained that weakening government capacity to support banks in distress led to the downgrade of the Nigerian banks.

“The secondary driver of today’s rating action is the Nigerian banks’ significant holdings of government securities, which generally exceed 100% of their core capital, linking their credit profile to that of the government. In view of the correlation between sovereign and bank credit risk, the banks’ standalone credit profiles and ratings are constrained by the rating of the government,” says the statement obtained by NewsmakersNG.According to Moody’s, the weaker credit profile of the Nigerian government exerts pressure on banks.

In its rating of FBN, Moody’s says: “The outlook on the deposit and issuer ratings remains negative. The affirmations reflect (1) FBN’s still weak asset risk metrics, with non-performing loans (NPLs) estimated at over 20% of gross loans as of June 2017, albeit on a declining trend, (2) still tight – although improving – foreign currency liquidity, counterbalanced by (3) the bank’s resilient pre-provision profitability…”

Last year, the Asset Management Corporation of Nigeria (AMCON) disclosed that it had 217 chronic debtors in its books, which included companies and individuals owing banks huge debts.

AMCON then published on its website 100 of the 217 chronic debtors, as directed by the Central Bank of Nigeria (CBN). The 100 debtors owe N953.43billion.

Moody’s statement further says: “Moody’s Investors Service (Moody’s) has today downgraded to B2 from B1 the long-term local currency deposit and issuer ratings of four Nigerian banks…and the long-term local and foreign currency issuer ratings of Bank of Industry, a Nigerian development bank…

“Today’s rating action follows Moody’s downgrade of Nigeria’s government bond ratings to B2, with a stable outlook, from B1, with stable outlook, on 7 November 2017…and reflects (1) the government’s reduced capacity to provide support to Nigerian banks in times of stress and (2) the banks’ significant holdings of government securities linking their credit profiles to that of the government. The decision to downgrade banks’ long-term foreign currency deposit ratings follows the downgrade of the relevant country ceiling for foreign currency deposits to B3 from B2.”

Moody’s also downgraded to B3 from B2 the long-term foreign currency deposit ratings of Access and GTB, as well as those of Union Bank, and FBN. Concurrently, Moodys downgraded the baseline credit assessment (BCAs) of GTB to b2 from b1.

Bankers told NewsmakersNG today that the implications of these downgrades is that banks would find it more difficult to raise foreign funding which, by extension, could affect corporate businesses that depend on them for long-term credit.

It also means those with bond would have their ratings downgraded, which negatively impacts yield.

One of the experts told NewsmakersNG: “In one word, if GTB, for example, wants to borrow $100million from Citibank before the downgrade, it could have accessed it at say 5% per annum, but with the downgrade, which means higher risk, Citibank may not want to lend the money at less than 6 or 7%.

“GTB, Zenith, Access and UBA currently have Eurobonds in excess of $2billion, subscribed by mostly foreign-based institutional investors. Same goes for government bond held by private individuals.”

“I expected one of the banks not to be badly affected because of its wide presence in other countries, but the Nigerian business remains 90% of its balance sheet.”

Here is part of Moody’s Individual Banks’ Main Rating Drivers as contained in the statement:

Union Bank of Nigeria Plc

Moody’s has today affirmed Union Bank’s BCA and adjusted BCA at b3, long-term local currency deposit rating at B2, local and foreign currency issuer ratings at B2 and global scale short-term deposit and issuer ratings at Not-Prime. Concurrently, Moody’s has downgraded Union’s long-term foreign currency deposit rating to B3 from B2, the long-term Counterparty Risk Assessment (CR Assessment) to B2(cr) from B1(cr), long-term local currency national scale deposit ratings to A2.ng from Aa3.ng and foreign currency national scale deposit ratings to A3.ng/NG-2 from A1.ng/NG-1. The outlook on all long-term deposit and issuer ratings remains stable.

The affirmations reflect (1) Moody’s expectation of robust levels of tangible common equity over the next 12 to 18 months, following the recent completion of a rights issue and (2) a stable deposit-based funding structure and moderate local currency liquidity buffers. These strengths are balanced against (3) elevated credit risks on the back of single-name and sector concentration risks and (4) relatively modest profitability levels versus larger local peers. The local currency deposit and issuer ratings also continue to incorporate one-notch uplift from the bank’s b3 BCA based on our assessment of a high probability of government support in case of need.

The decision to downgrade the long-term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2 follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. Similarly, the downgrade of the bank’s long-term CR Assessment reflects the government’s reduced capacity to provide support in case of need. As a result, the CR Assessment, which is positioned one notch above the adjusted BCA of b3, reflecting Moody’s view that its probability of default is lower than that of deposits, no longer benefits from government support uplift. The downgrade of the local currency deposit national scale rating (NSR) is a result of the repositioning of our relative ranking of Nigerian banks within our NSR map following the downgrade of the corresponding local currency deposit global scale rating.

First Bank of Nigeria Limited

Moody’s has today affirmed FBN’s BCA and adjusted BCA at b3, long-term local currency deposit rating at B2, local and foreign currency issuer ratings at B2, short-term global scale deposit and issuer ratings at Not-Prime, and local currency national scale ratings at A2.ng/NG-1. Concurrently, Moody’s has downgraded the bank’s long-term foreign currency deposit rating to B3 from B2, foreign currency national scale ratings to A3.ng/NG-2 from A2.ng/NG-1, and long-term CR Assessment to B2(cr) from B1(cr). The outlook on the deposit and issuer ratings remains negative.

The affirmations reflect (1) FBN’s still weak asset risk metrics, with non-performing loans (NPLs) estimated at over 20% of gross loans as of June 2017, albeit on a declining trend, (2) still tight – although improving – foreign currency liquidity, counterbalanced by (3) the bank’s resilient pre-provision profitability — with FBN’s pre-provision profits at 3.9% of average total assets — and an equity-to-assets ratio of 11.7% as of June 2017 and (4) a stable deposit-based funding structure and strong local currency liquidity buffers. The local currency deposit and issuer ratings also continue to incorporate one notch uplift from the bank’s b3 BCA based on our assessment of a high probability of government support in case of need.

The decision to downgrade the long-term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2 follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. Similarly, the downgrade of the bank’s long-term CR Assessment reflects the government’s weakened capacity to provide support in case of need. As a result, the CR Assessment, which is positioned one notch above the adjusted BCA of b3, reflecting Moody’s view that its probability of default is lower than that of deposits, no longer benefits from an additional notch of government support uplift.

Access Bank Plc

Moody’s has today affirmed the BCA and adjusted BCA of Access at b2, long-term CR Assessment at B1(cr) and global scale short-term deposit and issuer ratings at Not-Prime. Concurrently, Moody’s has downgraded Access’ long-term local currency deposit rating to B2 from B1, long-term foreign currency deposit rating to B3 from B2, long-term local and foreign currency issuer ratings to B2 from B1, long-term local currency national scale deposit ratings to A1.ng from Aa2.ng and foreign currency national scale deposit ratings to A3.ng/NG-2 from Aa3.ng/NG-1. The outlook on all long-term deposit and issuer ratings remains stable.

The affirmation of the bank’s BCA reflects its strong asset quality metrics and robust loan underwriting standards and risk management processes, large local currency liquidity buffers, and resilient capital buffers. These strengths are balanced against concentration risks in the bank’s loan book, including its exposure to loans denominated in foreign currency.

The downgrades are primarily driven by the rating agency’s view that the government’s capacity to provide support for Nigerian banks in times of stress has weakened as indicated by Moody’s recent downgrade of Nigeria’s government bond ratings to B2 stable from B1 stable. The decision to downgrade the long-term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2 follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. The downgrade of the local currency deposit NSR is a result of the repositioning of our relative ranking of Nigerian banks within our NSR map following the downgrade of the corresponding local currency deposit global scale rating.

Guaranty Trust Bank Plc

Moody’s has today downgraded GTBank’s BCA and adjusted BCA to b2 from b1, long-term local currency deposit rating to B2 from B1, long-term foreign currency deposit rating to B3 from B2, long-term local and foreign currency issuer ratings to B2 from B1, long-term local currency national scale deposit ratings to Aa3.ng from Aa1.ng, foreign currency national scale deposit ratings to A3.ng/NG-2 from Aa3.ng/NG-1 and long-term CR Assessment to B1(cr) from Ba3(cr). The Aa3.ng/NG-1 local currency deposit national scale rating (NSR) now represents the highest attainable NSR rating in Nigeria. The global scale short-term deposit and issuer ratings were affirmed at Not-Prime. The outlook on all long-term deposit and issuer ratings remains stable.

The downgrades are primarily driven by the bank’s high exposure to government securities that link the bank’s credit profile to that of the government. The decision to downgrade the long-term foreign currency deposit rating to B3 and the foreign currency national scale ratings to A3.ng/NG-2 follows the downgrade of the relevant country ceiling, which captures foreign currency and convertibility risks. The downgrade of the local currency deposit NSR is a result of the re-positioning of our relative ranking of Nigerian banks within our NSR map following the downgrade of the corresponding local currency deposit global scale rating.

GTBank’s ratings reflect (1) the bank’s resilient earnings generation capacity and robust capital buffers, which together provide a relatively thick cushion to withstand asset quality deterioration compared with domestic peers, (2) the bank’s high liquidity buffers and a predominantly deposit funded balance sheet, and (3) the bank’s robust franchise, which allows it to attract inexpensive deposits and to lend to high credit quality borrowers (relative to other Nigerian banks), resulting in relatively strong asset quality metrics and low credit costs.

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