By Modupe Gbadeyanka
Sterling Bank Plc’s Long-Term Issuer Default Rating (IDR) has been affirmed by Fitch Ratings at ‘B-‘ as well as its National Long-Term Rating confirmed at ‘BBB-(nga)’ by the agency with the Outlook Stable.
A statement issued by the rating firm explained that Sterling Bank’s IDRs were driven by its standalone creditworthiness as defined by its Viability Rating (VR).
It noted that the VR is constrained by challenging operating conditions in Nigeria, the bank’s modest franchise and developing business model, weaknesses in its financial profile, and its higher risk appetite than peers.
These factors are counterbalanced by Sterling Bank’s coherent strategy, especially its business transformation initiatives, and strong management team.
Sterling Bank’s financial profile is characterised by high credit concentrations, variable earnings and profitability, modest capital buffers based on its risk profile, and its structurally weak funding and liquidity profile.
The lender has high exposure to the oil and gas sector, representing 43.2 percent of gross loans at end-9M17, mainly to mid-sized corporates.
Around 38 percent of the bank’s loans at end-9M17 were in foreign currency, exposing it to currency volatility.
Sterling Bank’s impaired loans ratio (based on IFRS) increased to 3.5% at end-9M17 from 1.7% at end-2016, arising mainly from the troubled oil and gas sector.
Based on prudential requirements (all loans that are 90 days overdue), Sterling Bank’s NPL ratio was 6.1% at end-9M17.
Fitch said it believes that the bank’s asset quality remains highly sensitive to loan concentrations by industry and obligor despite its impaired loans ratio and NPL ratio being below sector averages.
There is inherent instability in Sterling Bank’s funding base and 40% of the bank’s customer deposits are from corporates, which, in our view, are price-sensitive and less stable. These deposits are also predominately short-term, exposing the bank to significant structural asset-liability maturity mismatches. Additionally, the deposit base is highly concentrated, the rating company said.
It added that Sterling Bank is addressing funding and liquidity risks by raising market funding, demonstrating good access to borrowed funds and debt securities issuance.
“Positively, we also note that the bank has successfully attracted more stable retail deposits, including strong growth in ‘non-interest-bearing’ deposits (albeit from a low base). With the rollout of the new strategy and franchise development, we expect structural weaknesses in the customer deposit base to be resolved over time.
“We believe the bank’s capital buffers are low (Fitch Core Capital Ratio of 13.2% at end-9M17), particularly due to its sensitivity to concentration risks,” it said.
Sterling Bank reported a Basel II total capital adequacy ratio of 11.4% at end-9M17, a modest buffer against its regulatory minimum of 10%.
In addition to higher retained earnings and by repositioning its balance sheet, the bank is expected to raise subordinated debt in the domestic market (which counts towards Tier 2 regulatory capital) to improve capital buffers.
“In the medium term, we expect Sterling Bank’s prospects to improve as the franchise strengthens with the expansion of its retail/SME and ‘non-interest-bearing’ lines and business reorganisation,” Fitch disclosed.
Sterling Bank’s National Ratings reflect Fitch’s opinion of its standalone creditworthiness relative to the best credits in the country. The National Long- and Short-Term Ratings of ‘BBB-(nga)’ and ‘F3(nga)’ take into account Sterling Bank’s overall risk profile relative to other Nigerian banks, including its limited franchise and weak financial metrics.
SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s (B+/Negative) weak ability to provide support, particularly in foreign currency. In addition, there are no clear messages from the authorities regarding their willingness to support the banking system. Therefore, the Support Rating Floor of all Nigerian banks is ‘No Floor’ and all Support Ratings are ‘5’. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.
RATING SENSITIVITIES
IDRS, VIABILITY RATING AND NATIONAL RATINGS
The bank’s IDRs are sensitive to rating action on its VR. This would most likely be triggered by material deterioration in asset quality that would add further pressure to Sterling’s already weak capital position. Any pronounced instability in Sterling’s funding profile could also put negative pressure on the bank’s VR.
