GCR downgrades Ecobank Nigeria Limited’s National Scale Rating to BBB+(NG); Outlook: Rating Watch.

08 Aug 2019 In Rating Notifications

GCR downgrades Ecobank Nigeria Limited’s National Scale Rating to BBB+(NG); Outlook: Rating Watch.

Lagos Nigeria, 08 August 2019—Global Credit Ratings has downgraded the national scale ratings assigned to Ecobank Nigeria Limited to BBB+(NG) and A2(NG) in the long and short term respectively, with a Rating Watch outlook. The ratings have been placed on ‘Watch’, which GCR expects to resolve by February 2020.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit ratings to Ecobank Nigeria Limited’s (“Ecobank” or “the bank”) based on the following key criteria:

The ratings take into consideration Ecobank’s weakened asset quality, liquidity metrics (relative to peers) and low capitalisation metrics, which was in breach of regulatory requirement at FY18 and as at year-to-date. However, key ratings support is derived from the continuous parental support from Ecobank Transnational Incorporation (“ETI”) as well as the bank’s status as a systemically important bank (“SIB”) in Nigeria.

Ecobank’s asset quality reflects sustained pressure in FY18, with the gross non-performing loans (“NPL”) ratio remaining elevated at 13.7% at FY18 (FY17: 14.5%) and rose to 14% at 1Q FY19. Although gross NPL ratio declined relative to FY17, this position was largely underpinned by N65.8bn write-off during the year. While loan recovery efforts have been intensified, management intends to maintain cautious loan growth, and gradually diversify the loan portfolio from its current focus on oil and gas sector (accounting for 42.8% of gross loans and advances at FY18) to the less susceptible sectors going forward. Total loans provision covered impaired loans by 66.3% at FY18 (FY17: 65.0%).

Total shareholders’ funds declined by 7.4% to N247.5bn at FY18, impacted by increased loan loss provision (partly on account of implementation of IFRS 9). Consequently, the bank’s risk-weighted capital adequacy ratio ended below the regulatory floor at 14.3% at FY18 (FY17: 16.0%) and 13.8% at 1Q FY19, compared to the minimum regulatory requirement of 16% for SIBs. To address this concern, management has indicated prospects of additional capital injection by its parent company (ETI) as well as issuance of a subordinated debt in FY19.

Although the bank’s statutory liquidity ratio measured above the regulatory requirement of 30% throughout FY18, the ratio of liquid and trading assets to short-term funding of 12.4% at FY18 (FY17: 11.1%) ranks low vis-à-vis peers. Furthermore, the contractual mismatch of assets and liabilities reflect a cumulative liquidity gap across the short-term maturity buckets (less than 12 months). The liquidity gap in the critical ‘less than one-month’ maturity buckets stood at N615.6bn, equivalent to 2.5x of shareholders’ funds at FY18. Liquidity risk is somewhat mitigated through interbank funding (particularly from affiliate banks of the ETI group) and available credit lines from other financial institutions.

Ecobank’s key profitability metrics weakened in FY18 following intensified margin squeeze, with the net interest income shrinking 19.2% to N86.2bn during the year. Total operating income declined by 15.7% to N139.5bn, although pre-tax profit was augmented by a combination of effective cost management and the direct application of part of loan loss charge to the balance sheet. Overall, total comprehensive income for the year ended down at barely 20.2% of the FY17 level. Pressure on profitability metrics persisted in 2019, with the bank posting a weak net interest income of N6.8bn and a net loss of N2.8bn in 1Q FY19, necessitating the immediate negative rating action. The ratings are placed on “Watch” to enable GCR monitor the bank’s progress with the planned recapitalisation as well as other strategic initiatives aimed at strengthening its performance metrics over the next six months.

Upward review of the ratings may follow a rebound in asset quality, profitability and capitalisation metrics as well as markedly improved competitive position. However, the ratings may be reviewed downward following a further weakening in asset quality, liquidity, capital adequacy and profitability.

NATIONAL SCALE RATINGS HISTORY

Initial rating (November 2006)
Long term: A+(NG)
Short term: A1(NG)
Outlook: Positive


Last rating (June 2018)
Long term: A-(NG)
Short term: A1-(NG)
Outlook: Stable


ANALYTICAL CONTACTS

Analysts
Yinka Adeoti/Julius Adekeye
Credit Analyst/Senior Credit Analyst
.(JavaScript must be enabled to view this email address)
.(JavaScript must be enabled to view this email address)
+234 1 904 9462-3


Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for rating Banks and Other Financial Institutions, updated March 2017
Glossary of Terms/Ratios, February 2016
Ecobank rating reports (2006-18)


RATING LIMITATIONS AND DISCLAIMERS

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT www.globalratings.com.ng


SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The ratings were solicited by, or on behalf of, Ecobank Nigeria Limited, and therefore, GCR has been compensated for the provision of the ratings.

Ecobank Nigeria Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings above were disclosed to Ecobank Nigeria Limited with no contestation of/changes to the ratings.

The information received from Ecobank Nigeria Limited and other reliable third parties to accord the credit ratings included the latest audited annual financial statements as at 31 December 2018 (plus four years of comparative numbers), latest internal and/or external report to management, full year 2019 detailed budgeted financial statements, year-to-date unaudited accounts to 31 March 2019, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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