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S&P Affirms AfDB’s ‘AAA/A-1+’ Ratings; Outlook Stable

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By Modupe Gbadeyanka

Global rating agency, Standard and Poors has affirmed its AfDB’s ‘AAA/A-1+’ Ratings with Outlook Stable. This is similar to Fitch’s recent affirmation of the Bank’s Triple ‘A’ rating with Stable Outlook as well.

In the statement, S&P summarised its ratings released on July 31, 2017 said it expects the African Development Bank (AfDB) will further increase its lending over the next two years, while maintaining its current stand-alone credit quality, with a very strong business profile and very strong financial profile.

“In addition, we incorporate into our ratings on AfDB potential extraordinary shareholder support, owing to callable capital from ‘AAA’ rated sovereigns.

“The outlook remains stable, reflecting our expectation that, over the next two years, the Bank will continue fulfilling its development mandate, benefiting from preferred creditor treatment, and that the amount and willingness of extraordinary shareholder support to the Bank will remain unchanged,” the rating agency said.

“The ratings on AfDB reflect our assessment of the bank’s business profile as very strong and its financial profile as very strong.

“Our assessment of its stand-alone credit profile (SACP) remains at ‘aa+’. We incorporate a one-notch uplift for extraordinary shareholder support from AfDB’s SACP, leading to our ‘AAA’ long-term rating on the bank,” the S&P report added.

The AfDB Group includes soft-loan windows – the African Development Fund (ADF), and the Nigeria Trust Fund (NTF). The Bank’s membership includes 54 African countries and 26 non-regional countries. AfDB lends predominantly to sovereigns, comprising about 76% of total credit exposures, while private-sector lending represents 21% of total credit exposures as of December 31, 2016.

“Our assessment of AfDB’s very strong business profile is based on our view of the bank’s role, public policy mandate, membership support, expectation for preferred creditor treatment (PCT), and governance. Most of the Bank’s sovereign lending has been concentrated in more economically developed regional members with strong creditworthiness. In 2014, the bank revised its credit policy to increase the number of member countries eligible to borrow, namely to include those member countries that while still economically developing, show improved creditworthiness.”

S&P reiterated the Bank’s history of fulfilling its mandate by providing financing, particularly for infrastructure development, through economic cycles.

It notes that the robust demand for its lending – which led to a nearly 30% increase in its loan portfolio during the 2009 global financial crisis – has reinforced its role.

AfDB currently uses the ADF and the NTF windows to provide assistance to member countries whose governments are currently not eligible to borrow from the Bank.

Among African governments, 17 are eligible to borrow only from AfDB, while 34 members may borrow only from the ADF and the NTF, and three countries are eligible to borrow under all three windows.

“We believe that expanding the number of eligible borrowing sovereigns in 2014 reinforces the Bank’s public policy role and mandate on the continent, although we expect only a gradual build-up of investments in these new eligible countries,” S&P said.

At the end of 2016, the Bank’s outstanding exposures increased significantly by 22.5% totaling UA (official reporting currency of the AfDB) 32.7 billion (US$43.9 billion), largely led by a 27% increase in sovereign exposure.

The report underscores AfDB’s views of private-sector financing as a key contributor to economic growth and development in regional member countries and is actively increasing its private sector, non-concessional, non-sovereign guaranteed exposure. AfDB aims to direct 40% of its total approvals to this asset class over the medium term. We consider that this strategy could weigh on the Bank’s business profile, if it implies the Bank is unable to fulfill its development mandate or maintain its financial performance targets, namely strong capital adequacy and asset quality, as a result of this growth. If we were to assess an increasing share of private-sector lending as less essential to the Bank’s public policy mandate than its traditional exposures, we could change our view of the Bank’s role, and our assessment of AfDB’s business profile could weaken. Rising exposure to the private sector could also worsen our risk-adjusted capital (RAC) ratio for AfDB and ultimately its financial profile, as private-sector lending would be ineligible for PCT.

“The Bank’s business profile incorporates our expectation that it will continue to receive PCT on its public sector exposure, an internationally recognized practice of excluding multilateral lending institutions (MLIs) from restructuring or rescheduling of sovereign debt. In our view, AfDB’s track record of PCT is weaker than that of other ‘AAA’ MLI peers. The Bank has experienced both arrears and defaults by public- and private-sector borrowers, respectively. Zimbabwe, Sudan, and Somalia are in arrears on their sovereign-guaranteed loans, reflecting large legacy outstanding balances. We understand that Zimbabwe is also working with the World Bank and other multilateral development banks on a plan to clear these arrears,” it read.

The report noted that the AfDB is in the process of further strengthening aspects of its governance and risk management in light of its weaker track record in managing asset quality, particularly for its non-sovereign guaranteed portfolio. “This is a priority for the Bank’s President, Akinwumi Adesina, of Nigeria, who assumed office on Sept. 1, 2015.” The agency says is expects the level of non-performing loans will rise, owing to the difficult operating environment facing its commodity dependent borrowing members and the increasing share of the non-sovereign loans. “This highlights the importance for prudently approving new loans and carefully monitoring the composition and credit quality of the overall portfolio. We could change our view on the bank’s business or financial profile if the controls and/or financial performance of the non-sovereign exposures do not meet our expectations.

“AfDB’s very strong financial profile reflects its capital adequacy and its funding and liquidity. S&P Global Ratings’ primary metric to assess capital adequacy, the RAC ratio, was 20.9% before adjustments specific to MLIs as of year-end 2016,” the statement added.

It noted, however, that after taking into account S&P Global Ratings’ MLI-specific adjustments, the RAC ratio was 21.3%. For AfDB, the predominant adjustment is a concentration penalization for sovereign exposures, which our expectation for continuing PCT somewhat offsets. The decline in the RAC ratio to 21.3% in 2016 from 24.4% in 2015 incorporates the significant increase in the bank’s total exposure by 22.5% to UA32.7 billion in 2016, from UA26.7 billion in 2015. It also reflects relatively rapid loan growth to the broader list of potentially less-creditworthy African countries following the amendment to the bank’s credit policy in 2014.

The agency further notes that asset quality is a rating weakness for AfDB relative to similarly rated MLIs, reflecting its focus on private- and public-sector borrowing in geographic areas that carry intrinsically higher operating and credit risks. NPLs in the private sector portfolio deteriorated in 2016 to a reported 7.6% of total private sector loans, up from 6.2% one year earlier. However, we note that NPLs for AfDB’s total loan book, including both private and public sector loans, stood at a moderate ratio of 1.9% of total portfolio.

It says given currently low commodity prices and weak global growth, we believe private sector asset quality will continue to weaken further in 2017. We consider AfDB’s loan loss reserve coverage to be modest, at 55% of impaired balances on Dec. 31, 2016, up from 49% one year earlier, with the prospect for increased provisioning in 2017. While its average coverage is low for a financial institution operating in Africa, the bank benefits from our expectation of PCT.

Noting that AfDB’s funding profile remains very diverse in terms of investor base, currency, and maturity, it avers that global benchmark bonds would remain the primary source of funding, with alternative sources from domestic markets, green bonds, Uridashi bonds, private placements, and loans. It further notes that the bank has a positive funding gap up to the two-year static gap. Thus, its positive funding ratio indicates that AfDB is structurally able to cover its scheduled debt repayments without recourse to new issuance for up to two years. However, this does not take into account new disbursements which have led to a marginal negative funding gap emerging over the five-year tenor.

“In our opinion, AfDB’s management of liquidity is sound, aided by the high level of liquid assets the Bank holds on its balance sheet,” the report said, noting that the Bank maintains a strong liquid asset cushion, accounting for 40.2% of adjusted total assets, 57.9% of gross debt, as of Dec. 31, 2016. Liquid assets it said, comprise high quality bonds, largely in the ‘AAA’ (45%) and ‘AA’ (38%) rating range, cash, and a small portfolio of asset backed securities. S&P liquidity ratios for AfDB indicate that the Bank would be able to fulfil its mandate for at least one year, even under extremely stressed market conditions, without access to the capital markets. It furthers estimates that that the Bank would not need to reduce the scheduled disbursements of its loan commitments, even if half of the total commitments were to be drawn in one year. “On this measure, we estimate year-end 2016 liquidity ratios were 1.9x at the one-year horizon without any loan disbursements and 1.2x with half-scheduled loan disbursements,” the report concluded.

Modupe Gbadeyanka is a fast-rising journalist with Business Post Nigeria. Her passion for journalism is amazing. She is willing to learn more with a view to becoming one of the best pen-pushers in Nigeria. Her role models are the duo of CNN's Richard Quest and Christiane Amanpour.

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Economy

Binance Gets Digital Asset Service Provider Licence in France

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By Adedapo Adesanya

Binance, the world’s largest crypto and blockchain infrastructure provider, has been granted a Digital Asset Service Provider (DASP) registration to operate in France.

The green light was given by Autorité des marchés financiers (AMF), which regulates the French financial markets, with the approval of the Autorité de Contrôle Prudentiel et de Résolution (ACPR), the authority responsible for supervising the banking and insurance sectors in France, especially AML Regulations.

The landmark achievement for Binance represents its first DASP registration in the European Union and demonstrates its commitment to being a compliance-first exchange.

The registration allows Binance France SAS to operate as a DASP in France and provides regulatory protection for local users with regard to the implementation of French AML/CFT and customer identification requirements.

This came just after the platform received licenses to be a crypto service provider in Dubai, the United Arab Emirates and Bahrain, a key milestone for the world’s largest digital-asset exchange as it set up the stage for a major push in the Middle East.

According to Binance, compliance and regulation are critical to the development and maturation of the crypto and blockchain industry.

Mr Changpeng Zhao (CZ), founder and CEO of Binance, said: “Effective regulation is essential for the mainstream adoption of cryptocurrency. The French DASP and AML/CFT regulations put in place stringent anti-money laundering and fit and proper requirements to meet the high standards necessary to be regulated in France.”

“We are grateful to the AMF and ACPR who both demonstrated a commitment to innovation that made it possible for Binance to navigate the entire application process. Since day one, Binance has always put its users first, and now the crypto community can have even further confidence in Binance France as a trusted DASP registered in France,” he added.

Mr David Princay, CEO of Binance France added, “The registration of Binance France as a DASP is a key milestone for crypto in Europe. In particular, the new levels of protection for AML will help grow crypto adoption in France and Europe. Greater adoption will help bring better liquidity to the market which will be welcomed by users and the community in particular.”

Following the registration, Binance will significantly expand its operations and intends to recruit more people focused on cryptocurrency and blockchain infrastructure development.

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Economy

We’ll Sustain High Level of Corporate Governance—Seplat

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By Aduragbemi Omiyale

The immediate past chairman of Seplat Energy Plc, Mr Ambrosie Bryant Chukwueloka (ABC) Orjiako, has assured that the company will continue to sustain a high level of corporate governance.

Speaking last Thursday at the closing gong ceremony to honour him and introduce his successor, Mr Basil Omiyi, to the market, the energy expert applauded the Nigerian Exchange (NGX) Limited for insisting on transparent and accountable corporate governance for issuers on its platform.

According to him, this has been critical to the company’s growth, assuring that this trend would be maintained in the interest of the firm’s stakeholders.

“The high level of corporate governance promoted by NGX for its listed companies was a key attribute that motivated Seplat Energy Plc to become part of the market.

“Since our acceptance into the market, Seplat Energy Plc has continued to deliver a corporate governance structure that is accountable and transparent to our investors, employees, government and all other relevant stakeholders.

“We are committed to sustaining these high levels of corporate governance through our collaboration with NGX as we implement market-leading measures towards ensuring Nigeria achieves a sustainable energy sector,” he said.

Corroborating him, Mr Omiyi, said, “NGX has played an instrumental role in Seplat Energy Plc’s growth within the domestic and international markets. Our history with the exchange dates back to 2014 when the shares of Seplat Energy Plc were listed in the market and over the years, Seplat has benefitted immensely from its collaboration with NGX.

“As we celebrate another milestone on the Trading Floor of the Exchange, we look forward to strengthening our partnership with NGX for the fulfilment of our joint goal of leveraging capital to empower sustainable initiatives that positively impact our investors, employees, and the environment.”

The chairman of NGX, Mr A.B. Mahmoud, in his address, congratulated Mr Orjiako for his exemplary leadership and outstanding performance of Seplat Energy for well over a decade, during which the company was listed on both NGX and the London Stock Exchange.

“The notable acquisition of eight oil and gas assets, expansion of the Oben and development of the ANOH gas plants under his leadership positioned the company as the largest indigenous domestic supplier of gas,” Mr Mahmoud, who was represented by a director on the bourse, Mr Kamarudeen Oladosu, he noted.

On his part, the CEO of NGX, Mr Temi Popoola, said, “The exchange is better positioned to lead government advocacy efforts for listed companies, promote technology advancement and digital innovation for the capital market, and increase retail investor participation in the capital market aimed at building a market for the future and addressing the prevailing challenge of financial inclusion.

“We welcome Seplat Energy Plc to a renewed NGX and look forward to deepening our collaboration to develop and push for disruptive, out of the box ideas that could support Nigeria’s energy transition into a net-zero economy.”

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Economy

JUST IN: CBN Raises Benchmark Interest Rate to 13%

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By Dipo Olowookere

For the first time in two years, the Monetary Policy Rate (MPR) has been raised by the Central Bank of Nigeria (CBN) to 13.0 per cent from 11.5 per cent.

Mr Godwin Emefiele, the Governor of the CBN, who announced this development on Tuesday in Abuja, explained that the decision to increase the benchmark interest rate was taken at the Monetary Policy Committee (MPC) meeting held yesterday and today.

While addressing financial reporters this afternoon, Mr Emefiele said members of the committee were unanimous with the decision to hike the rates as it was the best thing to do after holding them for about two years.

According to the central bank chief, one of the reasons for raising the rate is to control liquidity ahead of the 2023 general elections as politicians would be expected to flood the system with cash in a bid to woo voters.

However, the other parameters were left unchanged by members at the gathering as the Asymmetric corridor remained around the MPR at +100/-700bps, the Cash Reserve Ratio (CRR) at 27.5 per cent and the Liquidity Ratio (LR) at 30.0 per cent.

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