By Modupe Gbadeyanka
Fitch Ratings has announced affirming Diamond Bank Plc’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with the outlook negative. Also, Fitch affirmed all of Diamond’s other ratings.
The rating agency said Diamond Bank’s IDRs are driven by the bank’s intrinsic creditworthiness as defined by its Viability Rating (VR).
Diamond Bank’s VR considers its vulnerable asset quality. Loan impairment charges are consistently above peers and impaired loans as a percentage of gross loans was 9.6% at end-9M17, well above the sector average for rated banks, as reported under IFRS.
Reported impaired loans are not indicative of a very high level of problem loans. Around 20% of Diamond Bank’s loan portfolio is considered impaired under local prudential classification rules (90 days overdue). The bank has also restructured a sizeable proportion of its upstream oil portfolio.
Asset quality is indicative of the challenging operating conditions in Nigeria, including tight liquidity in both local and foreign currency. Tight liquidity dates back to the sharp fall in oil prices, which has adversely impacted asset quality sector-wide. Liquidity in foreign currency is particularly tight at Diamond Bank.
The bank holds almost $400 million of deposits from state oil enterprises, which should have been moved to the Central Bank of Nigeria (CBN) under new federal regulations, but Diamond Bank has been unable to meet this requirement given an acute shortage of dollars.
High loan impairment charges (averaging around 5% of gross loans per year) undermine solid pre-impairment earnings, which are the strongest among mid-sized and small Nigerian banks.
Strong pre-impairment earnings reflect a solid franchise, including a good base of retail deposits, providing a cheap local currency funding base. Cost efficiency is also stronger than peers.
The Negative Outlook on Diamond Bank’s Long-Term IDR reflects a precarious foreign currency liquidity position and pressure on capital from asset quality weakness.
Diamond Bank’s National Ratings are a reflection of its creditworthiness relative to the best credits in Nigeria.
Diamond Bank’s National Ratings consider generally weaker financial metrics than peers and the senior debt rating is in line with the Long-Term IDR and has a Recovery Rating of ‘RR4’ indicating average recovery prospects, Fitch said.
Fitch said in a statement that it 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, it noted that 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, it said.
The rating firm said Diamond Bank’s IDRs are sensitive to a rating action on its VR and its VR is sensitive to a material weakening of liquidity, particularly in foreign currency. It is also sensitive to a sharp deterioration in asset quality that would erode capital and threaten the bank’s viability.
An upgrade of the bank’s VR would require a material improvement in the Nigerian operating environment and a significant improvement in the bank’s financial metrics.
An upgrade of Diamond’s IDRs may also result from sovereign support being factored into the bank’s ratings.
