Lagos, 31 August 2021 – GCR Ratings (“GCR”) has affirmed Ecobank Nigeria Limited’s national scale long and short-term issuer ratings of BBB(NG) and A3(NG) respectively, with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|Ecobank Nigeria Limited||Long Term Issuer||National||BBB(NG)||Stable Outlook|
|Short Term Issuer||National||A3(NG)|
The ratings assigned to Ecobank Nigeria Limited (“the bank” or “Ecobank Nigeria”) balances its strong parental support from Ecobank Transnational Incorporation (“ETI” or “the Group”) and adequate funding and liquidity position, against weak asset quality, high loan book concentrations, and notable underperformance in earnings.
Ecobank Nigeria’s competitive position reflects its status as a tier 2 commercial bank in the Nigerian banking industry, operating as part of ETI, which evidences a strong pan-African franchise. The bank provides a suite of financial services to a broad client base, predominantly within the Nigerian market and with a moderate level of exposures to the rest of Africa regions through the pan-African footprint of its parent. The bank has market shares of 4.4%, 5.1% and 4.9% measured by total assets, customer deposits and gross loans respectively at FY20, which compares favourably to the GCR rated peers. However, over the review period (FY17-FY20) earnings have significantly underperformed that of peers due to a high cost to income ratio (80.8% in FY20 vs 94.1% in FY19) and lack of revenue stability. Management and governance is a neutral ratings factor.
The bank has sufficient levels of capital, with the regulatory capital adequacy ratio (“CAR”) improving to 21.4% at FY20 from 16.3% at FY19, largely supported by tier 2 funding secured in FY20, as well as a moderation in risk-weighted assets. GCR core capital ratio is assessed to be within the intermediate range, registering at 16.5% at FY20 (FY19: 15.3%). Cognisance is, however, taken of the bank’s considerably weak earnings profile and expected rise in risk-weighted assets as the loan book expands. As such, a negative adjustment has been made on capitalisation to reflect Ecobank Nigeria’s limited internal capital generation capacity over the rating horizon.
The risk position of the bank is a significant ratings negative. Although credit losses of 1.0% at FY20 (FY19: 0.3%) stood below the industry average of 3%, this was largely due to the relatively low provisioning made over the years, as the bank’s loan book persistently evidenced asset quality challenges. At FY20, non-performing loans (“NPL”) was high at 19.9% (FY19: 23.9%), significantly above the industry average of 6%, and the regulatory tolerable limit of 5%. The loan portfolio is heavily skewed towards the oil and gas sector, constituting 40.8% of total gross loans and advances at FY20 (FY19: 39.9%), while the top twenty largest exposures accounted for 65.3% of the loan book at FY20 (FY19: 68.3%). Further elevating the risk profile is the recurrent breach of the regulatory single obligor limit of 20%. Out of trend with other industry players, both the first and second largest obligor are in breach, constituting 28.0% and 21.3% of shareholders’ funds respectively at FY20. GCR also factored into its assessment the fact that a sizeable 65% of the loan book was restructured in FY20, albeit balanced by management’s representation that the bulk of these loans are performing in line with restructured terms.
Ecobank Nigeria’s funding and liquidity is positive to the ratings, reflecting the bank’s strong funding structure and liquid balance sheet. Customer deposits accounted for 79.8% of the funding base at FY20 (FY19: 81.6%), significantly above the 63.9% median for GCR rated banks in Nigeria. The depositor base is diversified, with the top twenty depositors contributing 21.4% to total customer deposits at FY20, while the relatively less expensive CASA deposits constituted 65% of customer deposits, helping moderate cost of funds to 4.4% at FY20 (FY19: 5.3%). Liquidity is adequate, with GCR liquid assets coverage of wholesale funding and customer deposits registering at a healthy 5.4x and 33.9% respectively at FY20.
Group support is a significant positive to the bank’s ratings. Ecobank Nigeria is 100% owned by ETI, a pan-African bank holding company, and through the Ecobank Group, ETI has presence in 35 African countries. Ecobank Nigeria is the highest contributor to the group and enjoys a high degree of integration with the group, albeit lagging in terms of performance. The group has also demonstrated commitment to providing strong financial and technical support to the bank.
The Stable outlook reflects GCR’s opinion that Ecobank Nigeria’s financial profile will be stable over the rating horizon, notwithstanding the evident challenges both internally and in the operating environment. While we do not foresee a material improvement in earnings, we expect that GCR core capital will be maintained at the intermediate range (>15%) over the rating horizon. We also expect that the bank will continue to resolve its problem loans to avoid further deterioration of asset quality, and equally expect minimal migration to stage 3 within the loan book, especially from the restructured loans.
An upward review of the rating is unlikely over the rating horizon. However, factors that will support an uplift include a marked improvement in earnings that compares favourably with peers and meaningfully strengthens internal capital generation capacity. Also, we would expect to see a substantial improvement in asset quality, with NPLs contained within the industry average alongside a normalisation of the persistent regulatory breaches of the single obligor limit, as well as a sizable reduction in loan book concentrations. The rating will be downgraded should growth in risk weighted assets vis-à-vis internal capital generation weigh down GCR computed capital ratio to the low range (<15%). Also, a further deterioration in the bank’s risk position, with significant credit migration to stage 3 and higher credit losses will trigger a negative rating action.
|Primary analyst||Abdul Mukhtar||Financial Institutions Analyst|
|Lagos, NG||Abdullahim@GCRratings.com||+2341 904 9462|
|Committee chair||Vinay Nagar||Senior Analyst: Financial Institutions|
|Johannesburg, ZA||Vinay@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, August 2021|
|GCR Financial Institutions Sector Risk Score, June 2021|
Ecobank Nigeria Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term issuer||Initial||National||A+(NG)||Positive Outlook||November 2006|
|Short Term issuer||Initial||National||A1(NG)||November 2006|
|Long Term issuer||Last||National||BBB(NG)||Stable Outlook||June 2020|
|Short Term issuer||Last||National||A3NG)||June 2020|
Risk score summary
|Rating Components & Factors||Risk Scores|
|Country risk score||3.75|
|Sector risk score||3.50|
|Management and governance||0.00|
|Capital and Leverage||(1.50)|
|Funding and Liquidity||0.75|
|Balance Sheet||Also known as 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.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|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.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
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 Nigeria 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 Nigeria 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 Nigeria Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2020
- Four years of comparative audited numbers
- Other related documents.