Fitch Reviews Bank Ratings in Line with Nigerian Downgrade

Downgrades FirstBank, UBA, expects banks to remain profitable in 2016 s S&P cuts Skye Bank’s rating
Obinna Chima
Fitch Ratings has reviewed its ratings on Nigerian banks. This, according to the international agency, was prompted by its recent downgrade of Nigeria’s long-term foreign currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-’ as well as the country’s long-term local currency IDR to ‘BB-’ from ‘BB’.

To this end, the agency with dual head office in London and New York, downgraded First Bank of Nigeria Limited and United Bank for Africa’s (UBA) long-term foreign currency Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’. Nevertheless, the international agency in a statement yesterday, explained that the outlook of the two financial institutions remained stable. The agency has also downgraded the National Long-Term Rating of FBN Holdings Plc (FBNH), the parent holding company of FirstBank, to ‘BBB+(nga)’ from ‘A(nga)’.

FBNH’s National Long-Term Rating is downgraded to ‘BBB+(nga)’ from ‘A(nga)’ and National Short-Term rating to ‘F2’ from ‘F1’ to reflect the negative pressure on the standalone credit profile of the main subsidiary FBN.

Stanbic IBTC’s and Stanbic IBTC Holding Company’s National Ratings have been affirmed and are based on the probability of support from their parent, Standard Bank Group Limited (SBG; BBB-/Stable).
Also, the senior debt ratings of Zenith Bank, Access Bank, Guaranty Trust Bank (GTBank), Diamond, Fidelity and Wema are affirmed in line with their respective Long-Term IDRs.

Continuing, it stated that the subordinated debt ratings of FBN (issued via FBN Finance BV) and Access are rated one notch below their respective VRs to reflect higher-than-average loss severity for subordinated relative to senior debt.
“Zenith and GTB would only be downgraded if their VRs are downgraded.

FBN’s, UBA’s, Access’s and Wema’s IDRs would only be downgraded if both their VRs and their SRFs are simultaneously downgraded and revised lower (the banks (GTB)’ VRs and SRFs are currently at the same level). The IDRs of Diamond, Fidelity, Union and FCMB are sensitive to a revision of their SRFs reflecting a change in the probability of the sovereign to provide support.

It also announced that the outlook on the long-term foreign currency IDR of Guaranty Trust Bank has been revised to stable, from negative due to continuing strong earnings and stronger-than-expected liquidity posted by the Nigerian bank.
“The IDRs of UBA, Access Bank, Wema Bank (Wema) are driven by both their standalone strengths, reflected in their VRs, and by the likelihood of sovereign support, reflected in their SRFs. Their VRs and SRFs are at the same level. The IDRs of FBN, Diamond Bank,

Fidelity Bank, Union Bank, and First City Monument Bank (FCMB) are driven by their SRFs.
“Fitch has revised the SRFs to ‘B’ from ‘B+’ for the systemically
important banks, FBN, UBA, Zenith and GTBank following the downgrade of Nigeria’s sovereign ratings. As a result, both FBN’s and UBA’s IDRs have been downgraded to ‘B’ from ‘B+’. The IDRs of both Zenith and GTBank are affirmed at ‘B+’ and are now driven by their respective VRs of ‘b+’,” it stated.

However, it disclosed that the systemically important banks’ SRFs remain a notch below the sovereign rating, reflecting the sovereign’s weak foreign currency position. Fitch believes that the willingness of the Nigerian authorities to support domestic banks continues to be high (as demonstrated in the past).

Nonetheless, it noted that government’s ability to provide support, particularly in foreign currency, was weaker due to the fall in oil prices that had eroded Nigeria’s foreign exchange reserves and foreign currency revenues.
“All other banks’, apart from Wema’s, SRFs have been affirmed at ‘B’.

Wema’s SRF is affirmed at ‘B-’, reflecting Fitch’s view of the bank’s lower systemic importance. Fitch has affirmed the IDRs of all of these banks. All banks apart from Wema have Support Ratings (SR) of ‘4’ indicating a limited probability of external support. Wema’s SR of ‘5’ reflects Fitch’s view that external support is possible but cannot be relied upon.

“FBN Holding is the holding company of FBN. Its SR of ‘5’ and SRF of ‘No Floor’ reflect Fitch’s view that while the Nigerian authorities’ propensity to support local banks is high, we would not expect the same level of support to apply to holding companies. FBNH’s IDR of ‘B’ is driven by the holding company’s ‘b’ VR. The latter is aligned with the VR of FBNH’s main operating subsidiary, FBN.
“The Long-Term IDRs of Zenith, UBA, Access, GTB and Wema are on Stable Outlooks as Fitch expects their VRs to remain unchanged (see below).

All other banks’ Long-Term IDRs are also on Stable Outlooks, reflecting the Stable Outlook on the sovereign rating as they are driven by the likelihood of state support. The Negative Outlook on FBNH’s Long-Term IDR reflects pressure on its subsidiary FBN’s VR. VRs,” it added.
Furthermore, it noted that the challenging and volatile operating environment in Nigeria and other key rating factors, particularly the banks’ financial profiles, constrained FBN’s VRs in the highly speculative ‘b’ range.
According to the agency, since its last review in February 2016, the bank’s asset quality has continued to weaken with average impaired loans (NPL) ratios of about 6.2 per cent at end-March 2016, although this is skewed by FBN’s high NPL ratio of 21.5 per cent.

“Impairments in banks are increasing in the commercial, trading and manufacturing segments, mainly due to foreign currency depreciation and scarcity. NPLs in the oil sector are also rising, but most of the larger problem loans are being restructured. FBN’s high NPL ratio is mainly due to the bank’s exposure to the downstream oil sector.
“Sustained low oil prices and continuing production disruptions in the Niger Delta could cause industry NPL ratios to rise more dramatically.

We also expect loan impairments to rise in the wake of the naira devaluation. Devaluation will primarily affect those Nigerian companies that are not adequately hedged by foreign currency income streams, and which will find it more difficult to service their foreign currency loans at the current exchange rate. The devaluation could also affect customer demand in the domestic economy,” it added.

However, Fitch stated that despite slower asset growth and higher loan impairment charges, it expects banks to remain profitable in 2016 due to still strong earnings generation.
It stressed that strong regulatory capital ratios have helped offset the one-off impact from the devaluation arising from Nigeria’s new FX regime.

“Nevertheless, the buffer between banks’ capital ratios and the regulatory minimum is reducing. We expect higher retained earnings to ease some of this pressure. Further erosion of capital ratios could be credit-negative. Despite the new FX regime, Fitch expects foreign currency liquidity to remain tight in 2016, particularly as supply has not increased dramatically.

“Some banks have accumulated sufficient foreign currency liquidity to meet 2016 maturities and we believe that they are managing their liquidity risks commensurately with their VR levels, but refinancing risk on the banks’ foreign currency obligations remains high. Naira liquidity is satisfactory,” it stated.

Meanwhile, Skye Bank Plc has been downgraded two levels by Standard & Poor’s (S&P) Global Ratings, which cited increased default risk after regulators stepped in to oust the Nigerian lender’s top managers

The CBN recently replaced Skye’s chief executive officer, chairman and 10 other directors, saying the Lagos-based bank’s liquidity and non-performing loan ratios consistently breached required levels. The stock has dropped each trading day since, falling to a record low on Tuesday, even after the central bank moved to calm markets after the intervention, saying Skye and the industry remained healthy.

According to Bloomberg, S&P lowered its long-term global-scale rating on Skye to CCC- from CCC+, and its Nigeria national-scale ratings to ngCCC-/ngC from ngB+/ngB. It also placed the lender’s global scale short-term rating on credit watch negative, while maintaining the long-term ratings and national-scale short-term rating on credit watch negative, it said.

The “downgrade by S&P will worsen the negative perception of the equity,’’ a banking analyst at Afrinvest West Africa Limited, Omotola Abimbola said.

“From the credit perspective, the bank has a high risk.”
“A default of Skye Bank within the next six months is highly likely, absent unanticipated significantly favorable changes in the bank’s condition,” S&P said in an e-mailed report. “At this stage, we understand the Central Bank of Nigeria has not yet communicated plans on how it intends to restore the bank’s business and financial profiles.”