Johannesburg, 31 October 2018 – Global Credit Ratings has affirmed Ecobank Ghana Limited’s long-term and short-term national scale ratings of AA-(GH) and A1+(GH) respectively, with the outlook accorded as negative. The ratings are valid until July 2018.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Ecobank Ghana Limited (“Ecobank”, “the bank”) based on the following key assumptions:
The ratings on Ecobank are supported by strong market position, stable funding and liquidity, adequate capital with stable internal capital generation and progressed recovery prospects of legacy debts. On the other hand, the outlook is negative reflecting the still weak levels of asset quality and moderating risk-adjusted capitalisation. We could lower the ratings on the bank if there is no material improvement in asset quality by end of 1st quarter of 2019, because in our opinion the level of non-performing loans (“NPLs”) including special mention loans is still too high and the general economic environment is improving. We could also lower the ratings if the capitalisation ratio moderates further. We do not expect to raise the ratings over the rating horizon.
Market position is strong. The bank benefits from its position as a top tier financial institution in the domestic market, and as such it has a stable funding structure comprising 93% of low-cost retail deposits. Revenue stability is evidenced, supported by healthy internal capital generation. The bank registered profit before tax (“PBT”) of GHC358m for its FY17, GHC105m down from the prior year. This is attributed to a nonrecurring gain realised from derecognition of a facility of GHC179m in FY16. On a normalised basis, the bank registered PBT growth of 26% in FY17. We expect this positive profit trajectory to be sustained over the rating horizon. The bank also has a favourable cost structure releasing operational efficiencies. However, the cost/income ratio increased to 52.4% in FY17 (FY16: 46.9%), although remains moderately low in absolute terms and against peers.
We remain cautious of moderating risk adjusted capital adequacy. The total capital adequacy ratio (“CAR”) reduced further to 13.8% at FY17 (FY16: 15.3%, FY15: 17.8%), although still above the regulatory minimum of 10%, as internal capital generation growth remains subdued owing to repricing effects on lending assets. The bank’s risk of regulatory forbearance (capital ratio close to regulatory minimum) is considered moderately low given it has 380bps headroom for breach. However, we may take negative rating action should the capital ratio fall within 100bps of regulatory minimum as we would view an increased risk of regulatory intervention which may reduce the bank’s financial flexibility, market confidence, and even causing default of certain capital instruments. Loan loss reserve coverage of 71% at FY17 is viewed to be adequate, supporting the bank’s loss absorption capacity.
Although asset quality somewhat stabilised with the gross non-performing loans (“NPLs”) ratio further reducing to 15.3% at FY17 (FY16: 15.9%) albeit still high. We are concerned much of this positive movement results from restructured exposures, which we view not to be sustainable. Furthermore, we see a significant increase in special mention loans (79.5% to GHC198m in FY17), which together with the restructured loans may potentially become NPLs.
Strengthening of the bank’s risk adjusted capital position, supported by bolstered internal capital generation, material improvement in asset quality, and sustained good liquidity may trigger upside movement in the rating. A negative rating action may follow deterioration in asset quality, weak earnings capacity, and declining capital ratio to regulatory forbearance level.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2013)||Last rating (December 2017)|
|Long-term: AA-(GH); Short-term: A1+(GH)||Long-term: AA-(GH); Short-term: A1+(GH)|
|Outlook: Stable||Rating Watch: Yes|
|Primary Analyst||Committee Chairperson|
|Simbarake Chimutanda||Matthew Pirnie|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Ecobank rating reports (2013-17)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Ecobank Ghana Limited participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Ecobank Ghana Limited.
Information received from Ecobank Ghana Limited and other reliable related parties to accord the ratings include:
- Audited financial results of the bank as at 31 December 2017 (plus four years of comparative figures);
- Unaudited interim results of the bank as at 30 September 2018;
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework;
- Capital management policy; and
- Industry comparative and regulatory framework.
The ratings above were solicited by, or on behalf of, Ecobank Ghana Limited, and therefore, GCR has been compensated for the provision of the ratings.
The ratings above are solicited by, or on behalf of, Ecobank Ghana Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|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.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms please click here
GCR affirms Ecobank Ghana Limited’s rating of AA-(GH); Outlook Negative.