Lagos Nigeria, 01 July 2019–Global Credit Ratings has today assigned SunTrust Bank Nigeria Limited national scale rating of BB(NG) with the outlook accorded as Stable. The ratings are valid until June 2020.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to SunTrust Bank Nigeria Limited’s (“SunTrust” or “the bank”) based on the following key criteria:
The accorded rating takes into consideration SunTrust’s operational track record of over two decades as a mortgage bank. As a recent entrant into the Nigerian commercial banking space, coupled with its categorisation as a regional bank, SunTrust’s operations are currently limited to two geopolitical zones and Abuja. The bank’s short-to-medium term focus is to deepen penetration within its niche support micro, small and medium scale enterprises by leveraging financial technology and digital channels.
SunTrust’s shareholders’ funds declined by 5.9% to N10bn at FY18, impacted by operational loss during the year. However, a significant reduction in risk weighted assets saw the bank’s risk-weighted capital adequacy ratio end at 48.5% at FY18 (FY17: 38.8%) well above the regulatory minimum of 10% for a regional bank. Management has informed Global Credit Rating Company Limited of plans to raise additional equity capital of about N10bn through private placement in 2019. Also, the bank expects to undertake a capital reorganisation exercise, which will involve writing off its negative retained earnings against share capital before end-December 2019.
The bank’s gross non-performing loan ratio ended down at 6.4% at FY18 (FY17: 17.7%), largely underpinned by write-off of legacy loans from its mortgage banking business as well as expansion in the loan book.
SunTrust’s liquidity position was maintained at a comfortable level in FY18, with the statutory liquidity ratio ranging between 71% and 140% throughout the year, against the regulatory threshold of 30%. However, the contractual mismatch of assets and liabilities reflects a liquidity gap of N14.7bn within the critical ‘less than one-month’ maturity bucket (equivalent to 1.5x of shareholders’ funds). The bank mitigates liquidity risk through short-term marketable securities and available credit lines from other financial institutions.
The bank’s key profitability metrics weakened in FY18, with the total operating income shrinking significantly 77.7% to N458m on account of net interest margin compression. Pressure on profitability was further exacerbated by an escalation in operating expenses to N3.5bn (FY17: N1.7bn) largely due to increased staff-related cost, expansion in business activities and brand promotion cost. As a result, the bank recorded a pre-tax loss of N3.9bn in FY18. Operational loss persisted to 1Q FY19, with the bank posting a pre-tax loss of N69.9m.
Upward review of the rating could follow the establishment and sustenance of a solid performance track record as a commercial bank particularly with a strong asset quality, profitability and efficiency metrics, as well as markedly improved competitive position. However, the rating would be sensitive to a material deterioration in asset quality, as well as sustained pressure on efficiency and profitability.
NATIONAL SCALE RATINGS HISTORY
Last rating (October 2016)
Long term rating: BB(NG)
Yinka Adeoti/Julius Adekeye
Credit Analyst/Senior Credit Analyst
+234 1 904-9462
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for rating Banks and Other Financial Institutions, updated March 2017
Glossary of Terms/Ratios, February 2016
SunTrust rating reports (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, SunTrust Bank Nigeria Limited, and therefore, GCR has been compensated for the provision of the ratings.
SunTrust Bank Nigeria 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 above were disclosed to SunTrust Bank Nigeria Limited with no contestation of/changes to the ratings.
The information received from SunTrust Bank Nigeria Limited and other reliable third parties to accord the credit ratings included the latest audited annual financial statements as at 31 December 2018 (plus four years of comparative numbers), latest internal and/or external report to management, full year 2019 detailed budgeted financial statements, year-to-date unaudited accounts to 31 March 2019, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.