Lagos, 10 May 2021 – GCR Ratings (“GCR”) has assigned Development Bank of Nigeria Plc’s (“DBN”) national scale long-term and short-term issuer ratings of AAA(NG) and A1+(NG) respectively, with a Stable Outlook. At the same time, GCR assigned DBN a long-term international scale rating of B, with a stable outlook.
|Rated Entity / Issuer||Rating class||Rating scale||Rating||Outlook / Watch|
|Development Bank of Nigeria Plc||Long Term||National||AAA(NG)||Stable Outlook|
|Long Term||International||B||Stable Outlook|
The ratings of DBN balances the bank’s relatively short track record (about four years) of mandate delivery against its strong capitalisation, minimal risk exposure, a largely wholesale but stable funding structure, complemented by sound liquidity profile.
DBN is a wholesale development finance institution (“DFI”), established through collaboration between the Federal Government of Nigeria (“FGN”) and international development institutions, with the mandate of improving access to financing for the micro, small and medium scale enterprises’ (“MSMEs”) by providing wholesale financing to eligible participating financial institutions (‘PFIs’) and providing guarantee through its wholly owned subsidiary (Impact Credit Guarantee Limited), thus, fulfilling a socio-economic role in the society.
The bank’s competitive position is supported by its clearly defined mandate and focused operation. However, these positives are partially offset by the relatively short track record, a concentrated mandate, and earnings that have been largely driven by returns on investment over the historical period. As at FY20, the bank has disbursed to a total of 22 PFIs (comprising eight commercial banks, 13 microfinance banks, one primary mortgage bank), from a low base of two when it commenced operation in 2017. Going forward, GCR expects competitive position to improve as the bank increases its coverage and ensures wider distribution by the PFIs, in order to effectively demonstrate its critical role within the operating environment.
Management and governance is considered to be neutral, given the robustness of the board, with representation by FGN and other international partners.
Capital and leverage is a key rating strength. GCR’s total capital to risk weighted asset ratio stood well above 100% at FY20 and surpassing the regulatory minimum. While we expect the capital adequacy ratio to moderate as the bank scales up operations and grow risk assets, the metrics are expected to remain strong over the short to medium term.
Risk position is considered neutral, given the relatively moderate size of the loan book (FY20: N215bn), constituting 43% of total assets (with no credit losses from inception till date), moderate to intermediate operational risk exposure, the absence of foreign exchange risk and the bank’s sound underwriting process, which provides for adequate loan collateral coverage and good recovery prospect. However, note is taken of the fact that DBN’s exposures are solely to financial institutions, resulting in concentration risk to the sector. Nevertheless, GCR’s expectation is that risk position will remain sound over the next 12-18 months.
As a development finance institution, DBN is not permitted to take deposits, as such, operations are largely funded by borrowings from other international financial institutions through FGN. The operating model is such that FGN obtains financing from international development partners and, in turn, passes it on to DBN for disbursement. Although, DBN and FGN have been named as borrowers on most of the borrowing agreements, the funds are disbursed directly to FGN and there are no untoward clauses against the bank so far. Going forward, management is planning to explore other opportunities to expand funding sources over the next 12-18months. This is considered a rating positive should it be successfully implemented.
The stable outlook reflects our expectation that DBN will maintain strong capitalisation and liquidity metrics over the next 12-18 months. Earnings are projected to be more reflective of core operations as the bank increases risk assets, with GCR’s core capital ratio expected to remain above the 30-35% band to sustain the risk score. Also, risk exposures are expected to increase moderately over the rating horizon, with likelihood of recording non-performing loans but expected to be well below 5% tolerable limits for banks.
A downward adjustment in the ratings may follow a significant decline in capitalisation, liquidity or asset quality metrics.
|Primary analyst||Funmilayo Abdulrahman||Senior Analyst, Financial Institutions|
|Lagos, NG||Funmilayo@GCRratings.com||+234 1 904 9462|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|GCR Financial Institutions Sector Risk Score, February 2021|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, February 2021|
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||4.00|
|Funding and liquidity||1.00|
|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 Ratings
GCR affirms that a.) no part of the ratings were 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 rating has been disclosed to Development Bank of Nigeria Plc. 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.
Development Bank of Nigeria Plc participated in the rating process via telephonic 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 Development Bank of Nigeria Plc and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2019;
- Unaudited financial results as at 31 December 2020 and
- Other relevant information.