Johannesburg, 8 December 2016 – Global Credit Ratings has affirmed the national scale ratings assigned to Ecobank Ghana Limited of AA-(GH) and A1+(GH) in the long-term and short-term respectively; with the outlook accorded as Stable. The ratings are valid until December 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Ecobank Ghana Limited’s (“Ecobank”, “the bank”) based on the following key criteria:
The accorded ratings reflect Ecobank’s established domestic market position, resilient financial performance and comfortable liquidity, notwithstanding a challenging economic climate and rising asset quality stress.
Ecobank is a subsidiary of Ecobank Transnational Incorporated (“ETI”, “the group”), a pan-African financial services group with operations spanning 36 African countries. ETI had a capital base of USD2.0bn and assets of USD20.9bn at 3Q F16. The level of technical and financial support provided by the bank’s parent, coupled with the ability to leverage off the strong brand name, was favourably considered. Ecobank’s status as Ghana’s most systemically important and largest bank in terms of balance sheet indicators and client base, further underpinned the rating.
The bank reported a total risk weighted capital adequacy ratio (“CAR”) of 14.9% at 3Q F16 (FYE15: 17.8%) and Tier 1 CAR of 11.7% (FYE15: 14.1%), which were above the regulatory minima of 10% and 8% respectively (Basel I).
Asset quality metrics deteriorated sharply in F15, with the gross non-performing loan (“NPL”) ratio rising to 18.0% at FYE15 from 1.8% at FYE14. Gross NPLs grew 11.9x to GHC590.2m in F15, mainly attributable to the downgrade of a large exposure to Tema Oil Refinery Limited (“TOR”), a state owned enterprise (“SOE”), to NPL status. The TOR exposure amounting to GHC477.1m at FYE15 represented 80.8% of total NPLs. Consequently, the gross NPL ratio remained elevated (18.6%) at 3Q F16. Positively, the government has successfully restructured the TOR debt with banks, with the interest component payable at a fixed interest rate of 20% (to be settled out of proceeds due to TOR under the Energy Sector Levies Act) beginning July 2016. The principal is to be repaid through purchase by banks of a special 10-year government bond (expected to yield at least the principal debt amount) issued end-November 2016. Excluding the TOR exposure, Ecobank’s gross NPL ratio amounted to 3.7% at 3Q F16. The average industry gross NPL ratio amounted to 14.7% at end-2015 before escalating to 19.2% at 1H 2016, reflecting the impact of volatility in the exchange rate, problems in energy provision, weak commodity prices, weak economic activity, and non performing exposures to SOEs in the energy and oil sectors. Ecobank’s specific provisions covered 18.6% of NPLs at 3Q F16 (FYE15: 24.7%), pre-collateral. NPLs net of specific provisions increased to 63.3% relative to capital at 3Q F16 due to the TOR exposure. Loan growth was significantly curtailed in F16 to focus on recoveries, with the bank recording a YoY growth of 4.6% at 3Q F16.
Net profit before tax grew by a modest 2.6% in F15 (F14: 66.8% increase) on the back of a sharp rise (2.6x) in loan impairment charges and relatively lower loan growth and foreign exchange related transaction volumes. Notwithstanding this, returns remained strong, with the ROaE and ROaA decreasing to 38% (F14: 47.0%) and 5.1% (F14: 6.1%) in F15 respectively.
The bank maintains a highly liquid balance sheet which partly ameliorates liquidity risk given the significant contribution to deposits by wholesale clients. The bank’s liquid assets (excluding mandatory reserve deposits with the central bank) to total short-term funding ratio, was a high 49.4% at FYE15 (FYE14: 55.2%).
Improved asset quality trends driven by low credit losses and sound underwriting, strong capital, liquidity and earnings metrics through the economic cycle, as well as additional franchise entrenchment and higher market share, would further enhance the bank’s financial profile. However, weak asset quality coupled with a significant deterioration in the bank’s profitability, liquidity and capital ratios associated with a highly challenging operating environment and/or weak credit administration, could lead to downward ratings migration.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2013)|
|Long-term: AA-(GH); Short-term: A1+(GH)|
|Last rating (December 2015)|
|Long-term: AA-(GH) ; Short-term: A1+(GH)|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior 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, updated March 2016
Ecobank rating reports (2013-15)
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 rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was 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 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 have been disclosed to Ecobank Ghana Limited with no contestation of the rating.
Information received from Ecobank Ghana Limited and other reliable related parties to accord the rating include:
- Audited financial results of the bank as at 31 December 2015 (plus four years of comparative figures)
- Unaudited interim results of the bank as at 30 September 2016
- Budgeted financial statements for 2016
- Latest internal and/or external audit report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Capital management policy
- 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS SECTOR GLOSSARY
|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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Exchange Rate||The value of one country’s currency expressed in terms of another.|
|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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term||Not current; ordinarily more than one year.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account (including taxes).|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Short-Term||Current; ordinarily less than one year.|
|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.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Ecobank Ghana Limited’s rating of AA-(GH); Outlook Stable.