Rating Action

Johannesburg, 11 December 2019 – GCR Ratings (“GCR”) has affirmed Ecobank Ghana Limited’s long and short-term Ghanaian national scale ratings at AA-_(GH)/A1+_(GH). The outlook is Stable.

On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities. This methodology is titled Criteria for Rating Financial Institutions. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the review under the new methodology. As a result, the ratings have been removed from ‘Under Criteria Observation’ and revised in line with the new methodology.

Rating Rationale

The below ratings factor in the following core elements of Ghanaian Country and Financial Institutions Sector risk into the assessment.

Republic of Ghana, Country Risk Score 3.75.

The Ghana country risk score of ‘3.75’ is supported by above average institutional strength scores for the sub-Saharan region and strong levels of economic growth, estimated to be around 7% in 2019/2020. The score is restrained by the relatively weaker external and moderate fiscal position of the sovereign, alongside the low wealth levels of the population.

Ghanaian Financial Institutions Sector Risk score: ‘2.5’

The Ghanaian financial institutions sector risk score of ‘2.5’ is restrained by the modest fiscal position of the government and state-owned enterprises, the currently high stock of sector wide Non-performing loans (“NPLs”) of approximately 18% at August 2019 and moderately high foreign currency lending (33% of total loans). We also consider the banking sector to be somewhat fragmented and regulated in line with regional norms. Broadly, we consider the 2018 regulatory reforms and recapitalization to have been a success in stabilizing the system. The banking sector is also considered to be adequately capitalized, with total CAR averaging around 19.8% at August 2019. Profitability is sound and improving, with a return on assets around 4.3% at August 2019, but the operating efficiency remains low. Local deposits are the primary funding source, with limited wholesale or external funding. Liquidity is sound, with cash and balances due from banks accounting for 35% of total assets. Fixed income capital markets are underdeveloped.

The ratings on Ecobank Ghana Limited (“Ecobank Ghana”, “the bank”) reflect the bank’s strong domestic market position, modest risk position, and sound funding structure with good liquidity. The ratings are restrained by our opinion that the bank’s capital levels will remain at the lower end of the intermediate range, over the outlook horizon. Furthermore, the ratings factor in the importance of Ecobank Ghana within Ecobank Transnational Incorporated (“ETI”, “the group”).

The competitive positioning of the bank is a relative strength to the rating, benefiting from its domestic leading position as a top tier financial institution. The bank had a deposit market share of 13.3% at 31 December 2018 within a fragmented banking sector supporting its strong retail footprint. Furthermore, cost of funds were below 2% comparing favourably to rated peers.

Capitalisation is a negative rating factor, balancing the low GCR capital ratio of 15.0% at 31 December 2018, and regulatory capital adequacy ratio of 14.1% at 30 September 2019, with robust earnings and sound internal capital generation. Although still above the regulatory minimum of 10%, the bank’s risk of regulatory forbearance (capital ratio close to regulatory minimum plus the 3% buffer) is considered moderately high given it has 110bps headroom before a breach. We may take negative rating action should the capital ratio fall within 100bps of regulatory. Loan loss reserve coverage is viewed to be adequate.

The risk position is neutral to the rating, as we factor in improving, although moderate recovery fundamentals for asset quality which broadly remains weak for the sector. NPLs decreased to 10% at 30 September 2019 from 16% at FY18 (FY17: 15.3%) and we expect settlement of Bulk Oil Distributing Company (“BDC”) exposures to improve the ratio further. We also remain cautious to aggressive loan growth, with the bank registering year-on-year growth of 55% as of Dec. 2018. Positively, the bank registered strong growth in trade finance and other syndicated exposures that has comparably lower impairments. We therefore expected credit losses to recover towards more normalised levels in the next 18-24 months. However, threat from loan book concentration of the 50 largest borrowers worsened at the year end from 67% in 2017 to 80% in 2018.

Funding and liquidity is a relative strength of the bank versus market peers. Funding structure is stable with core retail deposits comprising c.93% of total deposits. This low-cost funding structure supports the bank’s profitability. The GCR long term funding ratio and stable funding ratio were a solid 110% and 98% at 30 June 2019 respectively. Furthermore, liquidity is considered to be good, with a GCR liquid asset ratio of 55% at 30 June 2019.

The ratings benefit from parental support. Ecobank Ghana is wholly owned by ETI, a pan-African financial services group with operations spanning 33 African countries. Although not a material asset or revenue contributor, there is evidence of support from and assimilation with the parent. We believe ETI has the capacity to support the company based on its sound financial profile and good geographic diversification.

Rating Outlook

The outlook on the bank is stable, balancing an expectation that the bank will build capital and reserving, keep improving asset quality and sound funding/ liquidity.

Rating Triggers

We could raise the ratings if the bank raises and maintains capital adequacy at higher levels (above 23%) over the outlook horizon with sustained improvements in asset quality. We could lower the ratings if asset quality or capital deteriorates.

Analytical Contacts

Related Criteria and Research

Ratings History

Ecobank Ghana Limited

Risk Score Summary

Glossary

Salient Points 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.

The credit rating has 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 rating.

Ecobank Ghana Limited participated in the rating process via written correspondence. The ratings above were accorded based on publicly available information. The information used to analyse Ecobank Ghana Limited and accord the credit ratings included:

• Audited financial results as at 31 December 2018;
• Unaudited financial results as at 30 June 2019;
• Unaudited interim results at 30 September 2019;
• Banking sector information;
• Industry comparative data.