By Dipo Olowookere
The ratings of three banks in Nigeria have been downgraded Fitch Ratings amid fears that their operations would be negatively impacted by a further devaluation of the Naira.
A statement issued by the agency said the banks and others in the country will face material pressures from a weaker operating environment over the next few months given the price of crude oil and the impact of the COVID-19 pandemic on individuals and businesses.
The downgraded lenders are Zenith Bank, Guaranty Trust Bank (GTBank) and United Bank for Africa (UBA). Their ratings were lowered to Long-Term Issuer Default Rating (IDR) ‘B’ and Viability Rating (VR) ‘b’.
In the statement, Fitch said it has also placed the Long-Term IDRs, VRs and National Ratings of all 10 rated Nigerian banks (excluding Stanbic IBTC Holdings and Stanbic IBTC Bank, which are not assigned VRs and IDRs) on Rating Watch Negative (RWN).
According to the rating firm, before the current crisis, its outlook for the Nigerian banking sector was negative, which reflected tough operating conditions, including slow GDP growth, rising regulatory risks and potential performance pressures.
Fitch said it expects banks’ credit profiles to suffer from weaker asset quality and reduced profitability in the more severe downside scenario.
“Based on experiences from 2015/2016, we expect the current oil price shock to adversely impact the oil and gas sector.
“This sector accounts for around 30 percent of the banking sector’ gross loans, of which a large proportion was restructured during the previous crisis (some are still classified as Stage 2 under IFRS 9).
“Our stress tests show that asset-quality risks arising from deterioration of the banks’ oil and gas exposures are the biggest threat to their ratings.
“Additionally, we expect the non-oil segment to be impacted by the slower economy, but also due to the COVID-19 crisis, which could severely affect communities and industries. It would particularly test the quality of consumer and SME loans,” it said.
Fitch noted that lower oil revenues also raise the prospect of a material Naira devaluation, which would put pressure on the banks’ regulatory capital ratios.
However, it stated that given the banks’ net long foreign-currency positions, its stress tests show that in most cases the impact on Fitch Core Capital (FCC) ratios is tolerable under several scenarios.
“Nigerian banks have reasonable loss absorption buffers, underpinned by strengthened capitalisation since the last crisis.
“In the near-term, healthy earnings will continue to absorb larger credit losses but future profits will be under pressure from slowing loan growth, reduced client activity and higher levels of provisioning for expected credit losses under the IFRS 9 accounting framework,” it noted.
Fitch added that, “On balance, the near-term impact from the oil price shock and COVID-19 on funding and liquidity is likely to be tolerable.
“The primary risk is that lower oil revenues (and Nigeria’s falling FX reserves) could limit banks’ access to foreign currency (FC) liquidity.
“Furthermore, adverse global conditions could impede some banks in raising external financing. Local-currency liquidity remains strong with banks funded mainly by low-cost customer deposits.”
Fitch said it will resolve the RWN once it has assessed how this economic shock impacts the banking system and the credit profiles of each bank, as well as the banks’ ability to adapt.
The Central Bank of Nigeria (CBN) recently announced relief measures, which should alleviate some near-term asset-quality pressures.
Some of these include requesting banks to restructure loan tenors and terms for consumers and business that are most affected, particularly borrowers in the oil and gas, agriculture and manufacturing sectors.
