By Dipo Olowookere
Fitch Ratings has announced affirming the ratings on Zenith Bank, United Bank for Africa (UBA), Guaranty Trust Bank (GTBank) and Access Bank [ZUGA Banks], all with stable outlook.
In a statement issued by the agency, it was stated that the Long-Term Issuer Default Rating (IDR) on Zenith Bank and UBA were left at ‘B+’, while the Long-Term Issuer Default Rating (IDR) on Access Bank was affirmed at ‘B’, the Long-Term Foreign Currency Issuer Default Rating (IDR) on GTBank was affirmed at ‘B+’.
Fitch said the Viability Rating (VR) of Zenith Bank is among the highest it assigned to a Nigerian bank, reflecting the lender’s well-entrenched domestic franchise and market share.
“Zenith Bank is particularly strong in the prime corporate segment with a growing focus on retail banking. The bank’s franchise strength, management quality and clear strategy have allowed it to outperform peers through several cycles,” it said.
It further said the bank’s financial metrics are also strong compared with peers, pointing out that solid earnings generation and profitability (operating profit/risk-weighted assets of 7.1 percent in 1H19) reflect good margins, high levels of non-interest revenue and good cost control. Loan impairment charges have increased moderately and reflect some asset quality deterioration.
According to Fitch, Zenith Bank’s impaired loans/IFRS 9 Stage 3 ratio was 8.5 percent at end-1H19 (slightly up from 9.0 percent at end-2018) with loan loss allowance coverage at a comfortable 90 percent. Impaired loans rose in 2018 from consistently low levels due to a single large problem loan, highlighting the bank’s sensitivity to credit concentrations by obligor and industry.
It said the bank’s high capitalisation is a rating strength, with a regulatory total capital adequacy ratio of 23.4 percent at end-1H19, saying this is comfortably above the minimum 15 percent regulatory requirement (excluding its DSIB buffer).
For UBA, Fitch said its VR also reflects a strong franchise in Nigeria, as highlighted by market shares and a sizeable retail and current and savings accounts (CASA) deposit base, which translates into pricing power over smaller peers.
UBA’s overall franchise, Fitch said, is strengthened by a network of 19 subsidiaries across Sub-Saharan African (SSA) countries outside of Nigeria, which positions the bank to serve corporate customers operating across the continent and capitalise on trade flows. Operations across the rest of Africa (28% of assets at end-1H19; 41% of net income in 2018) provide a valuable source of diversification, particularly given the small contribution of each country.
It said execution on strategy has been particularly strong, as highlighted by exceptional retail deposit growth, increasing earnings contributions from the rest of Africa business and generally strong financial performance during challenging economic conditions.
However, it noted that loan quality remains weak as its impaired (Stage 3 under IFRS 9) loans ratio (5.6 percent at end-1H19) remains low relative to the sector average, but a large stock of Stage 2 loans (24 percent of gross loans at end-1H19) that are concentrated by single-borrower and derive from troubled sectors such as power and oil and gas, present a risk to UBA’s financial profile.
On the part of GTBank, Fitch said the IDRs and National Ratings are driven by the bank’s intrinsic creditworthiness, as defined by its VR, the highest assigned to a Nigerian bank. It said the VR also considers the bank’s strong financial metrics and high performance ratios, comfortable capital buffers and highly concentrated loan book.
It said the lender’s strong earnings support capitalisation and capital adequacy is a rating strength.
“GTB’s Fitch Core Capital/risk weighted assets ratio reached a high 26.7% at end-June 2019 and the bank’s internal target is to maintain regulatory capital ratios in excess of 17%, comfortably above the 15% prudential minimum required.
“Asset quality ratios compare well with peers and efforts to recover impaired loans are proving successful. The impaired loans/total loans ratio is on a declining trend, improving to 6.8% at end-June 2019. Loan loss reserve coverage reached 80%, which appears adequate considering available collateral. GTB’s IFRS 9 Stage 2 loans were equivalent to approximately 11% of loans at end-June 2019, which is broadly in line with close peers,” it said.
Fitch further said GTBank’s balance sheet is liquid. Loan deleveraging continued in 1H19, while deposit inflows are still positive (up 6%). Excess liquidity continues to be invested into Nigerian government securities. Regulatory pressure to encourage banks to lend to the real economy may result in positive loan growth during 2H19. Liquidity management is sound in both foreign and local currency.
For Access Bank, the rating agency said the acquisition of Diamond Bank in the first quarter of 2019 increased the lender’s consolidated assets by around 30 percent, creating Nigeria’s largest bank, with a 23 percent share of deposits (previously 11 percent).
“Following the acquisition, Access Bank’s traditional corporate business model is more balanced across retail and SME segments. Management’s objectives are to pursue a retail-focused, digitally-driven, growth strategy and position the bank as a regional leader in Africa.
“If achieved, this will boost Access Bank’s profile, but factors such as franchise, business model and strategic objectives currently have only a moderate influence on the bank’s ratings,” it said.
It added that, Diamond Bank’s asset quality was weak but management is successfully executing on a plan to write off impaired loans and focus on recoveries. The impaired (Stage 3) loans/gross loans ratio, which had exceeded 10% immediately following Diamond’s acquisition, fell back to 6.8% at end-June 2019.
This is broadly in line with ratios displayed by the most highly rated Nigerian banks (around 7%) but Access Bank’s share of Stage 2 loans as a proportion of gross loans is still fairly high at around 20%. Total loan loss coverage of Stage 3 loans is high at 112% (49% immediately post-acquisition), but specific coverage of Stage 2 loans is still low.
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