By Dipo Olowookere

Leading global rating company, Moody’s Investors Service (Moody’s) last week announced assigning first-time B2/Not Prime global local- and foreign-currency issuer ratings to Ecobank Transnational Incorporated (ETI), a Pan-African bank holding company incorporated in Togo.

According to Moody’s, the long-term ratings carry a stable outlook and as part of its analysis, the rating agency also assigned a notional baseline credit assessment (BCA) and adjusted BCA of b2 and b1, respectively, based on ETI’s consolidated financial statements.

Moody’s explained that ETI’s ratings reflect the group’s stable funding and liquidity profile, expansive geographic and business diversification, recovering profitability and Moody’s assessment of a moderate probability of affiliate support in case of need.

It noted that these strengths are balanced against the group’s high, but potentially moderating, asset risks and modest capital buffers, which are largely legacy issues that the bank’s new management is pro-actively addressing as part of a broader strategic plan. The new strategy also introduces digitalization and cost-cutting initiatives.

The rating agency disclosed that the stable outlook balances ETI’s stable funding profile, recovering profitability and business diversification against the group’s elevated, but potentially moderating, asset risks and modest capital buffers, which the rating agency expects will only slowly improve over the next 12-18 months in the context of continued challenges in the external environment of emerging markets.

ETI is a pan-African banking group, with banking subsidiaries in 33 African countries and total assets of $21.6 billion as of June 2018. As a bank holding company incorporated in Togo, which is part of the West African Economic and Monetary Union (WAEMU), it is regulated by the Central Bank of the West African States (BCEAO), the regional central bank.

According to Moody’s, ETI’s BCA of b2 reflects the group’s stable funding and liquidity profile, recovering profitability, diversification benefits and improving, but still challenging, macro-economic conditions in the African continent, balanced against the group’s elevated asset risks and modest capital buffers.

More specifically, it said the ratings reflect ETI’s deposit-based funding structure, with customer deposits accounting for 71 percent of total assets as of June 2018, and with limited reliance on riskier short-term market funding.

ETI’s deposits are granular and have historically proved stable, while the bank also has access to longer-duration market funding, which helps support its liquidity management and better match the duration of its assets and liabilities.

The group also maintains strong liquidity buffers, with cash and interbank balances representing 19 percent of total assets, while it can also count on an additional 28 percent of investment securities and government bonds, most of which can be repurchased through its subsidiaries’ respective central banks to source additional liquidity in case of need.

Moody’s also noted that as a Pan-African bank with banking subsidiaries in 33 African countries, ETI can substantially benefit from geographic and business diversification. The granular nature of ETI’s operations, combined with its entrenched African franchise helps diversify credit, operational and business risks.

In addition, the group’s broad diversification might act as a counterweight in times of stress by giving ETI a range of alternative sources of income and resources when other parts of the group may face challenges. Moody’s incorporates such benefits in the standalone BCA of the group.

Moody’s also noted that the group’s revised strategy makes it clear that management is committed to ensuring that all banking subsidiaries follow strict loan underwriting and risk management standards while reporting an adequate return on equity, with a clear understanding that a rationalisation of the group’s footprint may be needed where these goals cannot be achieved in a timely manner.

During 2017 and H1 2018, the group has already recorded a significant improvement in its earnings generating capacity, supported by the new management team’s focussed strategy and reorganisation initiatives that have led to cost cutting and lower provisioning requirements (2.6 percent of gross loans for H1 2018 compared to 7.8 percent in 2016). For H1 2018, the group reported bottom-line profits to ordinary shareholders of $135 million, up 28 percent year-on-year.

According to Moody’s, another credit factor behind the ratings assigned today is Africa’s economy and operating environment. Moody’s recognises that economic growth in Sub-Saharan Africa is accelerating, which will provide significant business opportunities for ETI, but also notes that the operating environment remains challenging. The rating agency uses a “Very Weak+” Macro Profile assessment for ETI, which is the weighted average of the Macro Profiles of the principal countries and regions in which the bank operates; more specifically: Cote d’Ivoire’s newly assigned “Weak-“; Nigeria’s “Very Weak+”; Ghana’s “Very Weak”; and Tanzania’s “Very Weak+”.

ETI’s ratings also reflect the group’s high asset risks, with the non-performing loans (NPLs)-to-gross loans ratio at 9.6 percent as of June 2018 and still high provisioning requirements (2.6 percent of gross loans for H1 2018).

Going forward, Moody’s said it does, however, expect a gradual reduction in NPL levels as economic growth accelerates and ETI strengthens its risk management capabilities and the new management’s on-going emphasis on improving its risk culture.

Similarly, Moody’s says considers the group’s capital buffers as modest, with the Moody’s-adjusted Basel II/III tangible common equity-to-risk-weighted assets ratio estimated at 5.6 percent as of December 2017, below the level reported by similarly-rated banks (of around 13 percent).

According to Moody’s, ETI’s major shareholders remain committed long-term investors, and Moody’s assesses that there is a moderate probability that they will support the institution with additional capital in case of stress. Moody’s therefore incorporates a one notch rating uplift due to affiliate support, placing ETI’s notional adjusted BCA at b1.

As a pan-African group with banking subsidiaries in 33 African countries, ETI remains an important institution for the African continent, and even more so for the WAEMU region, where it is incorporated and regulated by BCEAO, and where 40 percent of the group’s operations are situated. Although Moody’s does not impute any government support uplift, the rating agency assesses that in case of need the regulatory authorities will show flexibility and certain degree of forbearance that will allow enough time for management and shareholders to recapitalize the group.

ETI is a non-operational financial holding entity and its issuer rating is positioned one notch below its notional adjusted BCA of b1. This is because holding-company creditors are subordinated to creditors at banking subsidiaries in a bankruptcy or resolution context, and are thus likely to experience higher losses. This is also the case for ETI, which relies on the up-streaming of dividends from its investments to repay its own liabilities.

Moody’s said the stable outlook balances ETI’s relative strong funding and liquidity position, recovering profitability and business diversification benefits, against the group’s modest capital buffers and elevated — but potentially moderating — asset risks. Over the next 12 months, the rating agency expects that ETI’s NPL ratio will remain high despite a gradual reduction and lower NPL formation.

The rating agency said a rigorous implementation of management’s initiatives to strengthen the fundamental operations of the group and realise its full diversification potential, especially as measured by ETI’s non-performing loans and capital metrics, would lead to upward rating pressure.