THUR 02 DEC, 2021-theGBJournal- Moody’s Investors Service (Moody’s) Wednesday affirmed the B2 long-term local and foreign currency deposit ratings as well as senior unsecured ratings, where applicable, of nine major banks in Nigeria.
The banks include Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Limited, Union Bank of Nigeria plc, Fidelity Bank plc, FCMB (First City Monument Bank) Limited and Sterling Bank Plc.
At the same time, the rating agency changed the outlook on all the banks’ long-term deposit ratings to stable from negative.
The rating action reflects Moody’s expectation that higher oil prices and some measures taken by the government will help stabilise the sovereign’s credit metrics, thus stabilising the sovereign credit profile and, in turn, those of the banks. Moody’s affirmed Nigeria government’s long-term issuer ratings of B2 and changed its outlook to stable from negative on 29 November 2021.
Moody’s said the rating action reflects the banks’ financial profiles which have been generally resilient to the difficult operating environment in Nigeria. On average, the Nigerian banks’ asset quality has remained resilient and banks’ pre-provision profitability is recovering to pre-pandemic levels while their capital and funding positions, particularly in local currency, have remained solid.
The change of outlook to stable also reflects the links of Nigerian banks’ credit profiles to that of the government, whose outlook has been stabilised on 29 November, given the sizeable exposure to the sovereign debt securities, averaging 245% of the rated banks’ capital bases as of June 2021.
Furthermore, Moody’s expects that the capacity of the Nigerian government to support the country’s banks will remain unchanged.
The affirmation of the deposit ratings for the nine banks reflects Moody’s expectation that Nigerian banks’ solvency will remain at adequate levels over the next 12-18 months, supported by resilient profitability, while asset quality towards the large energy sector will benefit from the current high oil prices. Selective lending by banks in the past three years has restrained the formation of nonperforming loans (NPLs).
Reported systemwide NPL ratio has declined to 5.3% as of October 2021 from 6.0% as year-end 2020; the improvement also reflects the banks continuing to benefit from restructuring and forbearance. Going forward, once forbearance lapses, the rating agency expects some asset quality deterioration but the high oil prices, if sustained, will likely mitigate the pressures.
Moody’s also expects the banking sector to benefit from improving economic outcomes in Nigeria that are supported by high oil prices. The rating agency expects real GDP to grow by 2.8% in 2022 and by 3.5% per year on average until 2025, which, while remain insufficient to materially improve wealth levels, will likely produce quality lending opportunities for banks and will likely improve borrowers’ credit strength.
The Nigerian banks also maintain solid liquidity buffers, particularly in local currency. The rated banks’ average ratio of liquid banking assets to tangible banking assets was 49% as of end of 2020. While the system still faces foreign currency liquidity challenges, on average, Nigerian banks have improved their foreign currency liquidity and banks continue to cut back foreign-currency lending while building up foreign-currency liquidity buffers.
The affirmation of the ratings for all banks also captures the rating agency’s expectation that the high probability of government support for banks at times of stress remains intact following the affirmation of the B2 sovereign rating and outlook change to stable from negative.
The stable outlook on the banks’ rating reflects the stable outlook on the Nigeria’s government issuer rating given the banks’ large holdings of Nigerian government securities which they hold for liquidity and investment purposes. The large stock of government securities and loans links the banks’ credit profiles to that of the government. The rated banks’ overall sovereign debt securities averaged 245% of their tangible capital bases as of June 2021.
Moody’s on Monday changed the outlook on the Government of Nigeria to stable from negative and affirmed its long-term issuer and senior unsecured ratings at B2. Moody’s also affirmed the Government of Nigeria’s (P)B2 senior unsecured medium-term note program rating.
The change of outlook to stable reflects Moody’s expectation that higher oil prices and some measures taken by the government will help stabilize the sovereign’s credit metrics and support its external position.
The ongoing improvements in the macroeconomy and the external position are likely to continue in the next few years, supported by the oil price environment, Nigeria’s new Petroleum Industry Act legislation and the opening of the Dangote refinery that will structurally reduce demand for US dollars.
At the same time, Moody’s expects Nigeria’s fiscal deficit to narrow very slowly, with ongoing efforts to increase non-oil government revenue, although weak governance and institutional capacity are likely to hamper execution. General government debt (including central bank funding and promissory notes) is projected to rise gradually, towards 35% of GDP by 2025, stabilizing above 400% of revenue.
The affirmation of the ratings reflects Nigeria’s significant credit constraints, balanced by some credit strengths supporting the B2 ratings. The credit constraints include fiscal and external reliance on the hydrocarbon sector as well as its very weak institutional framework and governance, reflected in extremely low revenue generation. Susceptibility to event risk remains mainly driven by political risk.
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