GCR Downgrades Ecobank Nigeria Limited’s rating to A-(NG); Outlook Stable

31 May 2017 In Rating Notifications

GCR Downgrades Ecobank Nigeria Limited’s rating to A-(NG); Outlook Stable

Lagos Nigeria, 31 May 2017 — Global Credit Ratings has today downgraded the long-term national scale rating of Ecobank Nigeria Limited to A-(NG) and affirmed the short-term national scale rating of A1-(NG); with the outlook accorded as Stable. The ratings are valid until May 2018.

RATING RATIONALE

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

The ratings of Ecobank largely reflect its moderating competitive position, and subdued financial performance in recent years. However, the level of technical and financial support provided by the bank’s parent, Ecobank Transnational Incorporated (“ETI”), coupled with the ability to leverage off the strong brand name, was favourably considered. Ecobank’s status as a systemically important bank in Nigeria (in terms of asset size and client base), further underpinned the ratings.

Ecobank’s asset quality remained under pressure in FY16, with the gross non-performing loan (“NPL”) ratio remaining elevated at 9.1% at FY16 (FY15: 10.2%). While the gross NPL ratio declined relative to FY15, this position was largely supported by a significant N68.6bn (FY15: N24.4bn) loan write-off during the year, as the bank took advantage of CBN’s loan write-off window; as well as the sale of impaired assets totalling N80bn to Ecobank Specialised Finance Company (a fully owned Special Purpose Vehicle of ETI). Although, the bank has shifted focus to loan recovery, with muted loan growth prospects and strict selection process, GCR envisages additional impairments in the current year, given the unfavourable operating conditions. The NPL ratio stood at 9.5% at 31 March 2017 (“1Q FY17”).

The bank’s risk weighted capital adequacy ratio decreased to 16.7% (FY15: 18.7%) at FY16 (although still above the prudential floor of 15%), due to currency translation effects subsequent to the devaluation of the Naira, which led to a significant increase in the risk weighted assets. Ecobank has highlighted various initiatives to shore up capitalisation through additional capital injection by ETI and/or issuance of new shares which may dilute ETI’s shareholding in the entity.

Ecobank displayed a sizeable liquid balance sheet at FY16, with an average liquidity ratio of 46.6% over the 12-month period (above the regulatory minimum of 30%). However, foreign currency exposure was evidenced, given the bank’s high foreign currency denominated credits (50% of loan book at FY16). The bank is taking necessary mitigating measures which include portfolio realignment to reduce its risk level by FY17.

The bank posted a net profit after tax (“NPAT”) of N5.8bn for FY16, down 48.9% from FY15. As in the prior year, Ecobank’s profitability was considerably eroded following a significant impairment charge of N82.8bn in FY16 (FY15: N55.7bn). Furthermore, the NPAT was supported by foreign exchange gains of N39bn, which may not be repeated in the current year. While management has increased focus on loan recovery, results for 1Q FY17 was subdued further by additional loan loss expenses of N14.2bn, highlighting continued pressure on profitability.

While the current ratings benefitted largely from consistently demonstrated parental support, a positive rating consideration is dependent on a rebound to strong asset quality and profitability, with a sizeable improvement in competitive positioning. However, the ratings will be sensitive to a further weakening in the bank’s asset quality, profitability, liquidity and capital ratios, associated with the highly challenging operating environment and heightened credit losses.

NATIONAL SCALE RATINGS HISTORY

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

Last rating (October 2016)
Long term: A(NG)
Short term: A1-(NG)
Rating outlook: Rating Watch

ANALYTICAL CONTACTS

Primary Analysts
Femi Atere/Julius Adekeye
Credit Analyst/Senior Credit Analyst
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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
Nigerian Banking Sector Bulletin, 2016
Ecobank rating reports (2006-16)
Glossary of Terms/Ratios, February 2017


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 2016 (plus four years of comparative numbers), latest internal and/or external reports to management, full year detailed budgeted financial statements for 2017, most recent year-to-date management accounts to 31 March 2017, 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/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 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.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

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