By Dipo Olowookere
The ‘B-/B’ long- and short-term issuer credit ratings on Togo-based Ecobank Transnational Incorporated (ETI) have been affirmed by S&P Global Ratings.
Also, the firm its ‘B/B’ long- and short-term issuer credit ratings on Ecobank Nigeria Ltd with both outlooks stable.
A statement issued by S&P explained that the affirmation reflected its expectation that Ecobank group’s financial performance will improve gradually over the next 12-24 months, with lower problematic assets and slightly higher profitability on the back of more stable macroeconomic conditions in key operating markets.
In 2017, the group returned to profitability as a result of a significant decline in cost of risk and reduced operating costs.
“We expect the group’s asset quality indicators to continue improving over the next 12-24 months, including nonperforming loans (NPLs; loans overdue by more than 90 days) falling to around 7%-8% of total loans and coverage of NPLs by provisions increasing above 90%.
“To that end, the group is strengthening its credit risk management framework and monitoring processes,” the rating agency said.
It noted that under its base-case scenario, Ecobank will also maintain relatively elevated credit provisions at around 2.6% of total loans as it strengthens its NPL coverage ratio and transitions to International Financial Reporting Standard (IFRS) 9.
According to S&P, coverage of NPLs by provisions improved to 81% in the first half of 2018 from 52% at year-end 2017, incorporating $299 million of IFRS 9 provisions.
“We still view the group’s weak loss experience and exposure to moderate coverage of NPLs compared with peers as negative for its credit profile.
“We expect the group’s return on equity will average 15% over the next 12-24 months, which would somewhat support a stabilization of the group’s risk-adjusted capital (RAC) ratio around 3.3%-3.6% over the same period, assuming no dividend distribution. We see capitalization as a weakness for the group’s overall credit profile,” the statement said.
S&P noted Ecobank’s strong footprint in Africa and the new management team’s efforts to address its asset quality issues, stabilising its financial profile, and shift its strategy toward a targeted country-by-country approach rather than geographic expansion as a priority over earnings.
The rating agency pointed out that the funding base of Ecobank and its subsidiaries were in line with peers’, maintaining a reasonable level of liquidity.
“All of the group’s subsidiaries are largely funded by short-term customer deposits (total deposits accounted for 90% of the funding base and 173% of total loans on June 30, 2018), with a preference for retail and nonfinancial corporate current and savings accounts to lower the cost of funds. There is fungibility of liquidity within the group.
“Furthermore, at 134% as of June 30, 2018, the group’s stable funding ratio compares well with peers’. The group’s broad liquid assets-to-short-term wholesale funding ratio was at 7.7x at end-June
2018, while its net broad liquid assets covered 46% of short-term deposits at the same date.
“Overall, we assess the group credit profile at ‘b’. Our rating on ETI, the non-operating holding company, is only one notch below the group credit profile (rather than the standard two notches), since we do not see ETI as currently vulnerable to non-payment, or dependent upon favourable business, financial, and economic conditions to meet its financial obligations in the next 12 months.
“In addition, the group’s double leverage has stabilized around 100%, which we consider as moderately high. We understand that the group targets a double leverage ratio close to 100% over the next 12-24 months. We also consider Ecobank Nigeria a core subsidiary of the Ecobank Group.
“Ecobank Nigeria accounted for approximately 30% oftotal group assets at year-end 2017. Therefore, our ratings on Ecobank Nigeria reflect thewider group credit profile,” the statement said.
However, S&P warned that it would lower the rating on Ecobank Nigeria if the group’s RAC ratio fell below 3% or if the group exhibited a higher cost of risk than currently expected.
“We would also lower the rating on Ecobank Nigeria if we took a similar rating action on Nigeria.
“Finally, we would lower the ratings on ETI if we were to notice a significant increase in double leverage above 120%.
“An upgrade of Ecobank Nigeria or ETI appears unlikely over the next 12 months and would require a significant strengthening of capitalization or asset quality,” S&P disclosed.
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