Lagos, 05 October 2021 – GCR Ratings (“GCR”) has upgraded ProvidusBank Plc’s national scale long term issuer rating to BB+(NG) and affirmed the short term rating of B(NG); with a Positive Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|ProvidusBank Plc||Long Term issuer||National||BB+(NG)||Positive Outlook|
|Short Term issuer||National||B(NG)|
The ratings accorded to ProvidusBank Plc (“ProvidusBank”, “the bank”) reflect its limited competitive position, relatively stable funding structure, intermediate capitalisation, adequate liquidity, and moderate risk position.
ProvidusBank ranks among the tier 3 banks in Nigeria, having a limited track record of about five years in the local commercial banking space. The bank controlled a moderate market share of 0.8% and 0.9% in terms of the industry total assets and deposits respectively at FY20. Furthermore, ProvidusBank’s competitive position is constrained by its evolving brand franchise, short track record, and limited local geographical diversification (being a regional bank by licence). Given the small customer base, concentration risk is high, with the twenty largest obligors and depositors constituting 46.1% and 51.9% of gross loans and total deposits respectively at FY20. Though the bank operates with a regional licence and has only 10 branches, management confirmed to have access to customers across the country through aggregators, who are into agency banking, fintech, among others.
Capitalisation is viewed at an intermediate level, with the GCR core capital ratio closing FY20 at 18.1% (FY19: 20.5%). However, note is taken of the regulatory capital adequacy ratio (“CAR”), which although exceeded the statutory minimum at 10.5% at FY20 with a very thin buffer. Looking ahead, the bank is currently in the process of a capital raise of about N6.5bn and, accordingly, we expect to see a significant improvement in the CAR at end-December 2021 notwithstanding the bank’s aggressive loan growth pace.
ProvidusBank risk position is viewed to be contained, this evidenced by the gross non-performing loans (“NPL”) ending strongly at 2.6% at FY20 (FY19:4.4%), favourably below the Central Bank of Nigeria (‘CBN”) tolerable maximum limit of 5% and the industry average of about 6%. However, we believe that the strength of the bank’s risk management is yet to be fully tested, given its relatively short track record. Concentration by obligor is considered moderately high, with the single and twenty largest exposures accounting for 3.4% and 46.1% respectively of the loan book at FY20. We expect a more diversified loan book over the short to medium term, as the bank continues to strategically expand its lending activities. In addition, foreign currency (“FCY”) risk is considered minimal, with FCY loans constituting only about 6% of total exposures at FY20.
Funding and liquidity is a positive rating factor. ProvidusBank is largely funded through customer deposits, which has constituted around 70% of the funding base over the review period. The deposit book, which almost doubled in FY20, reflected the bank’s focus on the low-cost deposits, as the average cost of funds for the year was below 3%. Liquidity is good, evidenced by the highly liquid nature of the balance sheet over the review period. As at FY20, GCR liquid assets covered total wholesale funding moderately 2.2x, while the ratio of GCR liquid asset to total customer deposits stood at 69% (FY19: 41.3%). Furthermore, we note the sterilised funds with the CBN, representing about 46% of the deposit base at H1 FY21 (FY20: 40%), which could be made available to the bank in a stressed scenario, thereby supporting the liquidity risk assessment. In addition, the matching of assets and liabilities maturities at FY20 reflected cumulative liquidity buffers across the various maturity bands.
The Positive Outlook reflects GCR’s expectations of a more diversified funding as the bank grows its deposit base. We also anticipate an improvement in capitalisation upon the conclusion of the ongoing capital raise, supported by sound internal capital generation, and adequate loan loss reserving.
An upward rating could be triggered following a diversification of the bank’s funding base, while maintaining liquidity and capitalisation metrics at sound levels. We may lower the ratings if asset quality materially deteriorates and/or a weakening of the regulatory CAR.
|Primary analyst||Adeyinka Olowofela||Senior Analyst, Financial Institutions|
|Lagos, NG||Yinka@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|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, February 2021|
|GCR Financial Institutions Sector Risk Score, February 2021|
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||BB(NG)||Stable||June 2020|
|Short Term Issuer||B(NG)|
|Long Term Issuer||Last||National||BB(NG)||Stable||July 2021|
|Short Term Issuer||B(NG)|
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||0.00|
|Earnings vs. Risk||0.00|
|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.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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 ProvidusBank 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.
ProvidusBank Plc 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 ProvidusBank Plc and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2020
- Three years of comparative audited numbers
- Management account as at 31 March 2021
- Other related documents.