Lagos Nigeria, 29 June 2020 – Global Credit Ratings has assigned to ProvidusBank an initial national scale credit ratings of BB(NG) and B(NG) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until May 2021.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ProvidusBank Plc (“ProvidusBank” or “the bank”) based on the following key criteria:
ProvidusBank is a relatively new commercial bank, licensed with a regional authorisation (having previously operated as a mortgage bank in Nigeria). The bank is presently focused on carving a niche within retail banking segment.
ProvidusBank’s capitalisation appears strong relative to its current risk level, reflecting a risk-weighted capital adequacy ratio of 15.7% at FY19, considered a good buffer above the 10% regulatory minimum requirement for its license category. The bank registered a 62.6% increase in shareholders’ funds to N12.4bn at FY19 via a combination of capital injection and retained earnings in FY19. Notwithstanding this, management has indicated the likelihood of the bank undertaking further capital raising initiatives in the current year to further strengthen capitalisation and enhance operation.
Despite the clean-up of the loan book, through the sale of non-performing loans (“NPL”), totalling N1.8bn, during FY19, gross impaired loans escalated by 15% to N1.8bn at FY19, albeit translated to a lower gross NPL ratio of 4.4% (FY18: 9.1%) due to aggressive loan growth. Furthermore, the bank’s coverage ratio (total provision coverage of NPLs) of 15.4% at FY19 is considered low and concerning.
ProvidusBank’s liquidity position is weak, this is evidenced by the bank’s statutory liquidity ratio falling short of the minimum requirement at some point during FY19 (recording lowest ratio of 23.7% in September 2019, albeit normalising at year end at 42%). The matching of the bank’s asset and liability maturities at the balance sheet date shows a negative cumulative liquidity gap across all maturity bands. The contractual liquidity gap in the ‘less than three months’ maturity bucket stood at N34.7bn (2.8 times of capital). However, the bank is in the process of issuing commercial papers to cushion its liquidity challenges.
The bank’s performance in FY19 reflects a significant improvement and a complete turnaround from historical trend, as the bank was profitable for the first time since its conversion to a commercial bank. Performance was supported by notable growth achieved across both interest and non-interest income, which saw total operating income peak at N6.3bn during the year, from less than N1bn previously. Notwithstanding the rise in operating expenses during the year, the cost ratio moderated to 85.4% (still exceeding the industry average) due to the outpacing revenue growth. Specifically, ProvidusBank recorded a pre-tax profit of N673.1m for FY19, compared to a loss of N3.6bn in the prior year. Thus, return on average equity and assets improved to 5.7% and 0.6% from negatives in FY18 respectively.
Upward rating movement could result from a significant enhancement of market position, in addition to improvement in key performance metrics (especially profitability, liquidity, and asset quality). Conversely, a rating downgrade could follow a weakening and/or sustained pressure on earnings, asset quality, and liquidity metrics.
NATIONAL SCALE RATINGS HISTORY
Initial/last rating (June 2020)
Long term rating: BB(NG)
Short term rating: B(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Glossary of Terms/Ratios (February 2016)
RATING LIMITATIONS AND DISCLAIMERS
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and (d) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The ratings were solicited by, or on behalf of, ProvidusBank Plc, and therefore, GCR has been compensated for the provision of the ratings.
ProvidusBank Plc 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 rating above was disclosed and contested by ProvidusBank Plc, but the rating was sustained
The information received from ProvidusBank Plc and other reliable third parties to accord the credit rating included the latest audited annual financial statements as at 31 December 2019 (plus two years of audited comparative numbers), latest internal and/or external audit report to management, full year detailed budgeted financial statements for 2020, most recent year-to-date management accounts to 31 March 2020 reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.