A recent worrisome report released by Moody’s Investors Service (Moody’s) downgraded to B2 from B1 the long-term local currency deposit and issuer ratings of four Nigerian banks. It also downgraded the long-term local and foreign currency issuer ratings of another development bank.
The agency, in its new rating released Friday, listed the banks to include Access Bank Plc (Access), Guaranty Trust Bank Plc (GTBank), United Bank for Africa Plc (UBA) and Zenith Bank Plc (Zenith) while the Bank of Industry, BOI, was listed as the development bank.
Moody’s also downgraded to B3 from B2, the long-term foreign currency deposit ratings of Access, GTBank, UBA, Zenith, Union Bank of Nigeria plc (Union), First Bank of Nigeria Limited (FBN) and Sterling Bank Plc (Sterling).
Moody’s Corporation is the holding company that owns both Moody’s Investor Services, which rates fixed income debt securities, and Moody’s Analytics, which provides software and research for economic analysis and risk management. Moody’s assigns ratings on the basis of assessed risk and the borrower’s ability to make interest payments. Its ratings are closely watched by many investors.
Ratings range from AAA or Aaa (the highest) to C or D, which represents a company that has already defaulted.
Analysis of the report shows that concurrently, the agency downgraded the baseline credit assessments (BCAs) of Zenith and GTBank to b2 from b1.
Earlier on Tuesday, Moody’s released a report in which it downgraded the Nigerian government bond ratings to B2, with a stable outlook, from B1. But the Debt Management Office, in its reaction, had rejected the rating.
In its latest rating of banks, the agency noted that the rating reflects the government’s reduced capacity to provide support to Nigerian banks in times of stress and 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,” the agency said.
Commenting on the rationale behind the rating, Moody’s said the primary driver of the rating action is the weaker capacity of the government to provide support to banks, in case of stress, as reflected in the downgrade of the sovereign issuer rating to B2 from B1.
Subsequently, it said in its report, Access and UBA’s long-term local currency deposit ratings and Bank of Industry’s long-term issuer ratings no longer benefit from a one-notch uplift from their b2 BCAs (or standalone credit profile, as is the case for Bank of Industry) as these are now at the same level as the government bond rating.
The long-term local currency deposit ratings of Sterling, Union and FBN have been affirmed at B2, as their b3 BCAs continue benefiting from one notch of government support uplift, it explained.
The report explained further that the secondary driver of the rating action is the Nigerian banks’ significant holdings of government securities, which generally exceed 100 per cent 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.
“As a result, the BCAs for Zenith and GTBank have been downgraded to b2 from b1, in line with the downgrade of the government issuer rating, despite the resilient financial performance witnessed by both banks over the last 24 months.
“The BCAs of the other rated Nigerian banks have been affirmed as they already capture risks emanating from their sovereign exposures.”
For individual bank rating, the report 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. It, however, affirmed that the outlook on all long-term deposit and issuer ratings remains stable for the bank.
The report affirmed First Bank’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. The outlook on the deposit and issuer ratings, it said, remains negative.
For Access Bank Plc, Moody’s affirmed the BCA and adjusted BCA at b2, long-term CR Assessment at B1(cr) and global scale short-term deposit and issuer ratings at Not-Prime.
“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,” it said.
Similarly, for Guaranty Trust Bank Plc, the agency downgraded 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 while the global scale short-term deposit and issuer ratings were affirmed at Not-Prime. The outlook on all long-term deposit and issuer ratings also remains stable, the report said.
“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,” it added.
The ratings were also slightly similar in the case of Sterling Bank Plc, United Bank for Africa Plc (UBA), and Zenith Bank Plc.
On the Bank of Industry, BOI, Moody’s report showed that it downgraded the long-term local and foreign currency issuer ratings to B2 from B1 and its long term local and foreign currency national scale issuer ratings to Aa3.ng from Aa1.ng.
“The Aa3.ng/NG-1 national scale issuer rating now represents the highest attainable national scale rating (NSR) in Nigeria.
“All global scale short-term issuer ratings were affirmed at Not-Prime. The outlook on all long-term issuer ratings remains stable.
“Bank of Industry’s b2 standalone profile remains unchanged and reflects (1) its robust capital buffers, with an equity to assets ratio of 34.0% as of June 2017, (2) a stable liability structure made up of long-term funding at concessional rates and (3) the tangible improvements to the bank’s risk positioning in recent years. These strengths are balanced against (4) our expectation that asset quality will be increasingly pressured given then bank’s higher risk exposure to the micro, small and medium-sized enterprises (MSMEs) segment, which exposes it to riskier assets,” the report said.
On what could move ratings up or down, the report said demonstrated ability to contain non-performing loans while maintaining solid core profitability and capital generation could put upward pressure on the banks’ BCAs or lead to a stabilisation in the outlook, particularly in the case of FBN.
It added further that an upgrade of the banks’ global scale deposit and issuer ratings would be contingent on an improvement in the operating environment that translates to an upgrade of Nigeria’s sovereign rating.
“The ratings could be downgraded in the event of a further downgrade of the sovereign and/or if we assess that the government’s willingness to provide support in the future will decline below our current assumptions,” the report said.
“The ratings could also be downgraded if we anticipate that a deterioration in the macro environment poses downside risks for asset quality and/or the capital generation capacity of the banks beyond what is already assumed in the ratings.”
First published in Moody’s Investors Service