Rating Action
Johannesburg, 11 June 2020 – GCR Ratings (“GCR”) has downgraded Ecobank Ghana Limited’s (“Ecobank Ghana”) national scale long term and short term issuer ratings to A+(GH) from AA-(GH) and A1(GH) from A1+(GH) respectively, with a Stable Outlook.
| Rated Entity | Rating class | Rating scale | Rating | Outlook/Watch |
| Ecobank Ghana Limited | Long Term issuer | National | A+(GH) | Stable Outlook |
| Short Term issuer | National | A1(GH) |
Rating Rationale
The analysis on Ecobank Ghana Limited (Ecobank Ghana) reflects the strengths and weaknesses of the wider Ecobank Ghana Group. The downgrade takes into account the lowered country risk score from 3.75 to 3.5, marginally weaker business profile and the constrained capacity of Ecobank Transnational Incorporated (ETI) to financially support its’ subsidiaries. The ratings also reflect the bank’s sound business profile supported by above average market share, good levels of business diversification, franchise strength, and a track record of revenue stability, cognisant of breaches in sections of the Banking Act during the review period. Furthermore the ratings take into account weak capitalisation, relatively stable funding structure and appropriate liquidity. The outlook is restrained by the unquantified ramifications of the on-going COVID-19 pandemic and the vulnerability of the loan book to the adverse operating conditions and commodity linked corporates.
The bank has a strong competitive position in comparison to rated peers. At 31 December 2019, Ecobank Ghana was the largest bank in Ghana in terms of advances and deposits with approximate market shares of 12% and 13% respectively supporting its solid domestic footprint. Furthermore, cost of funds are expected to be sustained in the range of 1.5%-2% over the next 12-24 months, benefiting from the funding structure comprising over 80% in low cost retail deposits. We expect the bank will remain in the top 2 bank of choice in the next 24 months. GCR notes with concern non-compliance with sections of the Banking Act highlighted by the Bank of Ghana during a site review at 31 December 2019. It is our opinion that management need to increase compliance oversight particularly with statutes and regulations. GCR will continue to follow developments in that regard and review the ratings accordingly.
Capitalisation is a negative rating factor, balancing the moderately low GCR capital ratio of 15%-17.5% over the next two years, with robust growth in earnings and internal capital generation expected to range 30%-40%. Given the adverse operating conditions, reserving for stage 3 and stage 2 loans (41.3% at 31 December 2019) was deemed adequate. We anticipate additional pressure on capital stemming from increased provisioning in response to COVID-19 asset quality pressures.
The risk position is sound taking into account the improving albeit high stock of non-performing loans, 8.2% at March 2020 (7.5% at 31 December 2019) and moderately high foreign currency (FX) lending (36% of total loans). Initial assessments of the potential impact of the COVID-19 pandemic indicate that the bank may not be immune to the sector wide challenges which include credit extension and loan repayments. Positively, on-balance sheet exposure to the oil and gas sector (an adversely impacted industry) was less than 4% at 15 April 2020. Risks associated with the significant growth in loan commitments of GHC1.1bn at 31 December 2019 from GHC341.4m are mitigated by favourable contract conditions. However, failure to arrest unfavourable lending obligations may result in weaker asset quality.
Funding and liquidity is a ratings positive taking into account a relatively superior funding structure and adequate liquidity. A substantial proportion of total deposits over 80% are from stable low cost retail deposits. Core deposit ratio was 92% at 31 March 2020 up from 89% at 31 December 2019. The GCR long term funding ratio and stable funding ratio were a solid 108% and 91% at 31 March 2020 respectively (FY19: 103% and 77%). Liquidity is sound. The GCR liquid asset ratio was 56% at 31 March 2020 (FY19: 49%). FX liability coverage is considered adequate supported by a FX liquid asset coverage ratio of approximately 30% at 31 March 2020 (FY19: 28%). The funding and liquidity score may be lowered should the statutory liquidity ratio fall within 100bps of the regulatory liquidity ratio.
Ecobank Ghana is a subsidiary of ETI, a pan-African financial services group with operations spanning over 33 African countries. Parental support has not been factored into the ratings. We believe ETI’s capacity to financially support the bank is constrained due to its weak capitalisation reflected in high double leverage. However, although not a material asset or revenue contributor, there is evidence of technical and integration support from the parent.
Outlook Statement
The outlook is stable, balancing the turbulent operating environment and our expectation that asset quality will not deteriorate materially and that Ecobank Ghana will maintain sound financial performance building capital and reserving.
Rating Triggers
We may revise the ratings upwards if we see a material increase in capital and maintaining capital adequacy at higher levels (above 23%) over the outlook horizon. We could also raise the ratings following demonstrated regulatory compliance and an improvement in the financial profile of ETI. A deterioration in capital and asset quality could result in a downward revision of the ratings. Furthermore, the ratings may be lowered if the statutory liquidity ratio falls within 100bps of the regulatory minimum.
Analytical Contacts
| Primary analyst | Vimbai Muhwati | Financial Institutions Analyst |
| Johannesburg, ZA | VimbaiM@GCRratings.com | +27 11 784 1771 |
| Committee chair | Corné Els | Senior Structured Finance & Securitisation Analyst |
| Johannesburg, ZA | CorneE@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, May 2020 |
| GCR Financial Institutions Sector Risk Score, May 2020 |
Ratings History
Risk Score Summary
| Rating Components & Factors | Risk Scores |
| Operating environment | 6.00 |
| Country risk score | 3.50 |
| Sector risk score | 2.50 |
| Business profile | 2.00 |
| Competitive position | 2.00 |
| Management and governance | 0.00 |
| Financial profile | 0.00 |
| Capital and Leverage | -1.00 |
| Risk | 0.00 |
| Funding and Liquidity | 1.00 |
| Comparative profile | 0.00 |
| Group support | 0.00 |
| Government support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 8.00 |
Glossary
| 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 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 ratings.
Ecobank Ghana 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 Ghana Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2019
- Four years of comparative audited numbers
- Unaudited financial results as at 31 March 2020
- Breakdown of facilities
- Banking sector information and Industry comparative data
- Other related documents.
