By Adedapo Adesanya
A leading credit rating agency, Fitch Ratings, has affirmed African Export-Import Bank’s (Afreximbank) Long-Term Issuer Default Rating (IDR) at ‘BBB-‘ with Stable Outlook. Fitch also affirmed the bank’s Short-Term Issuer Default Rating (IDR) at ‘F3’ and senior unsecured debt at ‘BBB-‘.
In a report, the agency noted that the Afreximbank’s ‘BBB-‘ rating was driven by the bank’s intrinsic features, including solvency and liquidity, both assessed at ‘a-‘.
Despite the pressure on asset quality resulting from the COVID-19 crisis, the ongoing and expected capital increases support the resilience of the bank’s solvency.
Afreximbank’s solvency assessment of ‘a-‘ reflects its ‘strong’ capitalisation and ‘moderate’ risk profile, a statement from the agency said.
The ‘strong’ capitalisation is underpinned by the equity to assets and guarantees ratio, at 18.1 per cent in 2019, close to 2018 level (18.5 per cent) as the bank’s expansion has been broadly matched by paid-in capital payments from the ongoing $1 billion capital increase (targeted to be completed by end-2021, 91 per cent of which had been raised by the first half of this year) and internal capital generation.
Fitch’s usable capital to risk-weighted assets (FRA) was 21 per cent in 2019 (from 20% in 2018), consistent with a ‘moderate’ assessment (15-25 per cent).
The agency said it expects the equity-to-assets and FRA ratios to decline in the coming years as the impact of the COVID-19 crisis on asset quality affects internal capital generation and the bank accelerates loan disbursement in the short-term in response to the crisis. Fitch expects the growth in loans to average close to 20 per cent in 2020-2022.
However, it expects that the bank’s capitalisation metrics should remain consistent with a ‘strong’ assessment by the end of 2022. This assumes continuing payments under the $1 billion capital increase and the start of payments under a new $500 million capital increase, approved in June this year.
The Bureau of African Union Heads of States and Governments recently endorsed a significant increase to the bank’s subscribed capital. Fitch understands that the final approval of this capital increase could take place at the bank’s Annual General Meeting (AGM) in 2021, and the first paid-in capital payments would start shortly thereafter. In Fitch’s view, this capital increase would support the resilience of the bank’s solvency, despite the negative impact of the COVID-19 crisis on asset quality.
Fitch assesses Afreximbank’s overall exposure to risks as ‘moderate’, balancing its ‘high’ credit risk profile and ‘moderate’ risk management policies against its ‘low’ concentration risk and ‘very low’ equity and market risks.
The agency expects the average rating of the bank’s loan portfolio before accounting for credit risk mitigants to decline to ‘CCC’ over the medium term from ‘B-‘ as of end-2019.
Afreximbank’s business environment is deemed ‘high risk’, primarily reflecting its strategy, characterised by the rapid growth of its banking operations in high-risk countries.
Fitch assesses Afreximbank’s support rating at ‘bb’, unchanged from the previous review. The average rating of key shareholders fell to ‘BB-‘ following the change in the bank’s shareholder base and the recent downgrade of Nigeria, the largest shareholder.
The bank’s callable capital is partially supported by medium-term credit risk mitigants, which provides a one-notch uplift over the bank’s shareholders’ average credit quality, leading to ‘bb’ support capacity.
Fitch has revised the bank’s shareholders’ propensity to support to ‘strong’ from ‘moderate’ previously. This reflects regular inflows of fresh capital and the recent endorsement for a significant increase to the bank’s subscribed capital. The strong propensity results in a support assessment of ‘bb’.
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