Fitch Revises Nigerian Banks’ Issuer Default Ratings Downwards

By Obinna Chima

Fitch Ratings has revised downward the Long-Term Issuer Default Ratings (IDRs) of First Bank of Nigeria Limited, FBN Holdings Plc (FBNH), Diamond Bank Plc, Fidelity Bank Plc, First City Monument Bank Limited (FCMB) and Union Bank of Nigeria Plc to ‘B-’ from ‘B’.

The agency, however, affirmed the Long-Term IDRs of Zenith Bank Plc, Guaranty Trust Bank Plc (GTB), Access Bank Plc, United Bank for Africa Plc (UBA), Wema Bank Plc and Bank of Industry (BOI).

The rating agency explained that the downgrade was in line with their stand-alone creditworthiness as defined by their Viability Ratings (VR).

Also, the Support Rating Floors (SRFs) of 10 Nigerian banks  was lowered to ‘No Floor’ and downgraded nine banks’ Support Ratings (SRs) to ‘5’ following a reassessment of potential sovereign support for the banking sector.

Fitch stated this in a statement at the weekend.

SRFs reflect the agency’s view about the likelihood that a rated entity will receive extraordinary support in case of need, specifically from government authorities.

 This usually means from the national authorities of the country where the financial institution (FI) is domiciled, although in certain cases, Fitch may also factor potential support from international government institutions into its assessment. 

SRFs are assigned on the ‘AAA’ rating scale. Where there is no reasonable assumption that sovereign support will be forthcoming, an SRF of ‘No Floor’ is assigned.

“The downgrade of the banks’ SRs and the revision of 10 banks’ (including Wema) SRFs to ‘No Floor’ reflects Fitch’s view that senior creditors can no longer rely on receiving full and timely extraordinary support from the Nigerian sovereign support if any of the banks become non-viable.

“Fitch believes that the Nigerian authorities retain a willingness to support the banks, but its ability to do so in foreign currency is weakening due to Nigeria’s eroding foreign currency reserves/ revenues, as well as limited confidence that any available foreign currency will not be used to execute other policy objectives.

“Therefore, Fitch takes the view that support, if ever required by the banks, cannot be relied upon. The Long-Term IDRs of Diamond, Fidelity, FCMB and Union Banks are downgraded to ‘B-’ as they are now underpinned by their VRs of ‘B-’ rather than their SRFs, as was previously the case. The downgrade of FBN’s Long-Term IDR reflects both a revision of its SRF and a downgrade of its VR.

“The latter reflects Fitch’s view that the bank’s capital base is no longer commensurate with its risk profile, reflecting questions about asset quality, particularly its level of unreserved impaired loans to Fitch Core Capital (54 per cent at end-June 2016) and pressure on its regulatory capital adequacy ratio. The VR of FBNH has also been downgraded, which drives the downgrade of its Long-Term IDR to ‘B-’. Fitch has also downgraded the National Long-Term Ratings of Diamond, Fidelity, FCMB and Union Bank to ‘BBB(nga)’ from ‘BBB+(nga)’ following the rating actions on their Long-Term IDRs.

“The National Long-Term ratings of FBN and FBNH have also been downgraded to ‘BBB(nga)’ from ‘A+(nga)’ and ‘BBB+(nga)’, respectively,” it stated.

Furthermore, the international rating agency said it was currently monitoring the banks’ ability to meet maturing foreign-currency obligations, stating that in the current difficult market conditions, it believes Nigerian banks are facing challenges to refinance existing obligations and/or obtain foreign exchange from the Central Bank of Nigeria (CBN) to meet maturing obligations.

The new foreign-exchange regime has provided limited respite in accessing foreign currency in the interbank market, Fitch added.

FX forward contracts provided by the central bank since June 2016 have helped reduce large overdue trade finance obligations, which were either extended or refinanced with international correspondent banks.

“Fitch has not considered the extension/refinancing of overdue trade finance obligations by some Nigerian banks as a distressed debt exchange (DDE). For a debt restructuring to be classified as a DDE under Fitch’s criteria, the restructuring must impose a material reduction in terms compared with the original contractual terms, and the restructuring or exchange must be conducted to avoid bankruptcy, similar insolvency or intervention proceedings, or a traditional payment default.

“In our view, the extension/refinancing of overdue trade finance obligations has not led to a material reduction in terms for the correspondent banks. It is also uncertain whether the extension of these obligations would have prevented a traditional payment default. Extension/refinancing could be classified as a DDE if some banks continue to roll over these obligations.

“Asset quality across all segments of the economy is being affected by currency depreciation, rising inflation and scarcity of foreign currency for key sectors. In our view, asset-quality problems are understated by high levels of restructured loans at many banks, particularly in the oil and gas sector. Sustained low oil prices and continuing production disruptions in the Niger Delta could cause industry NPL ratios to rise more dramatically,” Fitch added.

Fitch expects banks to remain profitable in 2016 despite slower asset growth and higher loan impairment charges due to still strong earnings generation and, for most banks, potential exchange gains from long foreign-currency positions.

It noted that Nigerian banks remain exposed to further depreciation of the naira against the United States dollar.

“The main impact is on regulatory capital ratios due to the translation effect of risk-weighted assets. Some banks have limited buffers over regulatory minimums and any further erosion of capital ratios beyond our expectations could be credit negative.

“Zenith Bank and GTB have the highest VRs in the sector at ‘B’+, reflecting their relatively strong and resilient franchises and sound financial metrics compared to peers through the cycle. Access and UBA have VRs of ‘b’. These reflect good financial metrics compared to peers and relatively good franchises,” it added.