Johannesburg, 10 June 2021 – GCR Ratings (“GCR”) has affirmed Ecobank Ghana Limited’s national scale long and short-term issuer ratings of A+(GH) and A1(GH) respectively, with a Positive Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook|
|Ecobank Ghana Limited||Long Term issuer||National||A+(GH)||Positive Outlook|
|Short Term issuer||National||A1(GH)|
The ratings on Ecobank Ghana Limited (“Ecobank Ghana”) reflect a strong business profile supported by leading market shares, stable funding sources and good levels of liquidity. The ratings also factor in improving capitalisation and increasing asset quality risk.
The competitive positioning of the bank is a relative strength to the rating, benefiting from its well-established franchise and leading domestic position as a top tier financial institution. Out of 23 banks, Ecobank Ghana was the largest bank in terms of deposit and advances at 31 December 2020. Market share of deposits was 12.4% (FY19: 13.1%) and market share of gross advances was 10.4% (FY19: 12.6%) within a fragmented banking sector supporting its strong retail footprint. Furthermore, cost of funds below 2% compare favourably to rated peers. Ecobank Ghana is one of the leading digital banks in Ghana leveraging on Ecobank Transnational Inc’s (“ETIs”) extensive digital strategy innovations. As such, we consider the bank to be adequately equipped to deal with the ramifications of COVID-19 from a business continuity level.
Ecobank Ghana is adequately capitalised. The GCR capital ratio was 19.6% at 31 December 2020 (FY19: 20.0%), comparing well with peers and is expected to range between 20% and 23% over the next 12 to 18 months. We think the COVID-19 pandemic has not had as severe of an impact on the banks earnings when compared to domestic peers, and we believe the bank’s forward-looking earnings capacity is still good and will support future capital generative capability. We anticipate 1) good internal capital generation over 25%, outpacing risk weighted asset growth over the rating horizon; and 2) moderate credit losses. Reserving is adequate with Stage 3 loans coverage of 99.5% on 31 December 2020 up from 76.6% in December 2019.
Asset quality has come under pressure amidst the COVID-19 pandemic. The lifting of moratoriums including payment holidays, sustained depressed activity of some sectors, and increasing cost of doing business is likely to continue to weigh negatively on asset quality over the coming year. The bank recorded a regulatory non-performing (“NPL”) ratio of 12% at 31 March 2021 against the industry average of 15.5%. The percentage of the restructured loan book is fairly contained, and positively, has been reducing since the initial onset of the pandemic. We think IFRS 9 NPL’s could continue to rise from 7.8% at 31 March 2021 as the full impact of the pandemic is realised, with lower regulatory reliefs. Positively, we consider loan loss reserving of c.100% at 1Q2021 to provide good coverage of expected losses. The bank’s net-open position of less than 10% of shareholder funds at FY20 is considered ratings neutral.
Funding and liquidity is a positive ratings factor, supported by a stable funding structure and good levels of liquidity. The bank’s funding is considered stable, with customer deposits making up 94% of the group’s funding base at 1Q2021. Though deposits are predominantly demand deposits they have historically been sticky. The retail deposit base is made up of low-cost current and savings accounts (“CASA”), c.90% to total customer deposits (FY19: 86.9%). The bank’s liquidity position is adequate informed by very high liquid asset coverage of wholesale funding. Liquid assets to customer deposits rose to 78% at 1Q2021 (1Q2020: 56%). There was broadly higher growth in core deposits in the market and most banks were able to improve liquidity positions, especially after the initial liquidity crunch post the onset of COVD-19, which has subsequently subsided, and more risk aversion has seen better short-term liquidity. Total deposits registered annual growth of 15.2% on 31 March 2021 against average industry growth of 26.1%.
Group support is neutral to the ratings. ETI owns 68.93% of the issued ordinary shares of Ecobank Ghana. ETI is a pan-African financial services group with operations spanning over 33 African countries. Although not a material asset or revenue contributor, there is evidence of integration and technical support from the parent. However, we believe ETI’s capacity to financially support the bank is constrained due to high double leverage and consequently low capitalisation. The bank’s other shareholders are the Social Security and National Insurance Trust (16.21%), and the remaining shareholders own less than 2%.
The outlook is positive balancing GCR’s expectation that Ecobank Ghana’s financial profile would be resilient despite the strains in the operating environment and that the bank will relatively outperform the market in terms of earnings over the rating horizon. Furthermore, we expect the GCR Capital ratio to average 20-22%, supported by high internal capital generation outpacing risk weighted asset growth, and rising cost of risk. We expect asset quality metrics to be either better than or in line with industry averages, as the operating volatility subsides without a material adverse impact on loan book exposures. Furthermore, we factor in a better than average business profile over the outlook horizon.
We could raise the ratings if Ecobank Ghana raises and maintains a higher GCR capital ratio (above 23%) over the outlook horizon. We could also raise the ratings following consistent regulatory compliance and an improvement in the financial profile of ETI. We could lower the ratings if: 1) credit losses are at levels above 5% in the outlook horizon; 2) asset quality deteriorates below industry averages; 3) the company records internal capital generation at levels lower or in line with risk weighted asset growth; or 4) liquidity ratio falls within 100bps of the regulatory minimum.
|Primary analyst||Vimbai Mandebvu||Financial Institutions Analyst|
|Johannesburg, ZA||VimbaiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Corné Els||Senior Structured Finance & Securitisation Analyst|
|Johannesburg, ZA||CorneE@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, March 2021|
|GCR Financial Institutions Sector Risk Score, May 2021|
Ecobank Ghana Limited
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||3.50|
|Sector risk score||3.00|
|Management and governance||0.00|
|Capital and Leverage||(0.75)|
|Funding and Liquidity||1.00|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Ecobank Ghana Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Ecobank Ghana Limited participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from Ecobank Ghana Limited and other reliable third parties to accord the credit ratings included:
- The audited summary financial results to 31 December 2020
- Unaudited interim results to 31 March 2021
- Four years of comparative audited numbers
- A breakdown of facilities available and related counterparties
- Industry comparative data
- Other related documents.