Fitch to Upgrade Ecobank Ratings if Exchange Rate Volatility Eases

By Aduragbemi Omiyale

There is every possibility for an upgrade in the ratings of Ecobank Transnational Incorporated (ETI) and Ecobank Nigeria Limited (ENG) if the exchange rate volatility in Nigeria eases.

This is the position of a global rating agency, Fitch, in its latest rating action.

The firm had placed the Viability Ratings (VRs) of ‘b-‘ and Long-Term Issuer Default Ratings (IDRs) of ‘B-‘ on Rating Watch Negative (RWN) on the lender following the sharp devaluation of the Nigerian Naira by the Central Bank of Nigeria (CBN) a few weeks ago.

Fitch, in a statement, indicated that the current RWN reflects the risk of ENG breaching its minimum capital requirements due to the direct effect of the devaluation.

“For ENG, it also reflects increased risks to capital from large foreign-currency (FC) problem loans (Stage 2 and Stage 3 under IFRS 9) that have been inflated by devaluation, which may necessitate greater prudential provisions and exert further pressure on the bank’s total capital adequacy ratio (CAR), in addition to broader loan quality risks stemming from the devaluation,” a part of the statement said.

However, it noted that there could be an upgrade in ENG’s National Ratings in the next six months if the bank’s creditworthiness is strengthened.

Fitch said the bank’s RWN should be resolved “within the next six months when exchange-rate volatility may recede, the impact on regulatory capital ratios and common equity double leverage is clear, and the scale of the second-order economic effects of the devaluation on loan quality becomes evident.”

It said factors that could, individually or collectively, lead to positive rating action and upgrade include Ecobank’s continued compliance with its minimum CAR requirement following the devaluation, with sufficient buffers to accommodate the increase in credit concentration and loan quality risks.

It noted that an upgrade of ENG’s VR and Long-Term IDR would require a sovereign upgrade and an improvement in operating conditions in conjunction with a strengthened financial profile.