International Ratings agency, Fitch has cautioned Nigeria over the position of their commercial banks, revising its outlook on four prominent banks to Negative from Stable, while affirming the Long-Term Issuer Default Ratings (IDRs) of 10 banks and financial institutions.
The affected financial institutions are First Bank of Nigeria Ltd (FBN), United Bank for Africa Plc (UBA), Guaranty Trust Bank Plc (GTB), Diamond Bank Plc (Diamond), Fidelity Bank Plc (Fidelity), Union Bank Plc (Union) First City Monument Bank Limited (FCMB), Wema Bank Plc (Wema) and the bank holding company, FBN Holdings Plc (FBNH).
According to the report, “The IDR Outlooks on GTB (at B+) have been revised to Negative following a recent similar action on Nigeria’s (B+) Outlook. The other two banks, whose Outlooks have been revised to Negative, are Diamond and FBN/FBNH and the revision reflects their weaker financial profiles. We have downgraded the Long-and Short-Term National Ratings of FBN/FBNH and Diamond to ‘BB+(nga)’ and ‘B(nga)’ respectively to reflect heightened vulnerability of capital due to downside asset quality risks.
The IDRs, the report stated are all in the ‘B’ range, indicating highly speculative fundamental credit quality, and factor in the banks’ weakened credit profiles due to challenging macro-economic conditions and market volatility.
The rating agency noted that the operating environment continues to be affected by the oil price shock, slow GDP growth, continuing pressure on the naira, scarcity of hard currency in the FX interbank market and policy uncertainty. The VRs continue to be pressured by tight foreign currency liquidity, asset quality deterioration and limited capital buffers. The sector remains largely profitable, but operating profits in 2016 were inflated by foreign currency revaluation gains (due to the sharp depreciation of the naira in June 2016).
Fitch said it is monitoring the banks’ ability to meet maturing external obligations given current difficult market conditions and limited supply of foreign currency from the Central Bank of Nigeria (CBN).
According to the report, the new foreign-exchange regime has provided limited respite in accessing foreign currency in the interbank market. FX forward contracts provided by the CBN since June 2016 have helped the banks access foreign currency to reduce a large backlog of overdue trade finance obligations, it noted.
Fitch stated that some banks have limited buffers over regulatory minimums and further erosion of capital ratios beyond its expectations could be credit-negative.
The report stated that the Negative Outlooks on their Long-Term IDRs reflect Fitch’s view that they cannot be rated above the sovereign due to the close correlation between the domestic operating environment and their credit profiles, including large holdings of government securities.
UBA’s VR reflects the bank’s strong franchise and company profile, which includes a broad pan-African footprint, as well as healthy financial metrics, including adequate capital and leverage ratios and resilient earnings.
FBNH’s and FBN’s VRs reflect the group’s traditionally strong franchise and company profile in Nigeria and regionally and a large retail network. The VRs also factor in the bank’s very high non-performing loans (NPL) ratio, large loan concentrations to the oil sector and weak capital position.
The Outlook on the Long-Term IDRs is revised to Negative to reflect continued pressure on capital as addressing its substantial asset quality problems will likely take time. Diamond’s VR reflects the bank’s high risk appetite and weaker earnings.
The Outlook on the Long-Term IDR is revised to Negative to reflect a very tight foreign currency liquidity position and pressure on capital arising from weak asset quality.
Fidelity’s VR reflects the institution’s strong second-tier franchise and sound capital ratios as well as sensitivity to high credit concentrations and weak earnings.
FCMB’s VR reflects the bank’s limited company profile, exposure to higher-risk segments, tight foreign currency liquidity and weak earnings generation.
Union’s VR reflects a high NPL ratio compared with peers, tight foreign currency liquidity and modest, albeit improving, revenue generation. It also reflects pressure on regulatory capital ratios, which the bank intends to address by raising core capital. Wema’s VR reflects the bank’s small franchise, modest earnings and profitability and still low capital buffers. It also reflects a lower proportion of foreign currency assets and liabilities than peers’, meaning it is less affected by current liquidity pressures.
