Johannesburg, 21 December 2017 – Global Credit Ratings (“GCR”) has affirmed Ecobank Ghana Limited’s long-term and short-term national scale ratings of AA-(GH) and A1+(GH) respectively. The ratings have been placed on ‘Rating Watch’ and are valid until June 2018.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Ecobank Ghana Limited (“Ecobank”, “the bank”) based on the following key criteria:
Ecobank’s ratings reflect its well established domestic franchise, resilient financial performance and comfortable liquidity. Offsetting these key rating drivers is the weak asset quality mainly attributable to non-performing exposures to Bulk Oil Distribution Companies (“BDCs”) and a challenging economic climate, which have negatively impacted the domestic banking industry’s (including Ecobank) loan quality and earnings growth. GCR takes note of ongoing efforts by the Government of Ghana to restructure and repay legacy debt in the oil sector to safeguard financial stability. The Rating Watch provides GCR with an opportunity to review the bank’s credit strength over the next six months. The timely resolution of the BDC exposures expected in early 2018 could ease earnings pressure and reduce the bank’s capital at risk.
Ecobank is a subsidiary of Ecobank Transnational Incorporated (“ETI”, “the group”), a pan-African financial services group with operations spanning 33 African countries. ETI had a capital base of USD2.0bn and assets of USD20.9bn at 3Q FY17. The level of technical and financial support provided by the parent, coupled with the ability to leverage off the strong brand name, was favourably considered.
The bank reported a total risk weighted capital adequacy ratio (“CAR”) of 15.3% at FY16 (FY15: 17.8%), which was above the regulatory minima of 10%. The CAR declined to 10.2% at 3Q FY17, although rising to 12.1% at 30 November 2017 on the back of some loan settlements.
Asset quality remains under pressure mainly due to delayed resolution of the BDCs’ debt to the domestic banking industry. The gross non-performing loan (“NPL”) ratio decreased to 15.9% at FY16 (FY15: 18.0%), supported by loan write-offs, loan restructuring and enhanced collection efforts. The gross NPL ratio decreased further to 12.0% at 3Q FY17. The BDC exposure amounted to GHC364m or 82% of total non-performing loans at 3Q FY17. Comparatively, the domestic banking industry’s average gross NPL ratio amounted to 17.3% at end-2016 (2015: 14.7%) escalating further to 21.2% at 1H 2017. Positively, the government has agreed to a payment plan and has paid portions of the BDC debt with banks via bond issues. Ecobank’s specific provisions covered 31.0% of NPLs at 3Q FY17 (FY16: 7.7%), pre-collateral. NPLs net of specific provisions were 48.8% relative to capital at 3Q FY17 (FY16: 58.8%). Loan growth was significantly curtailed beginning FY16 to focus on recoveries, with the bank recording a YoY loan growth of 2.6% at 3Q FY17.
Earnings growth remained subdued in FY16, attributable mainly to high loan impairment charges, subdued lending and lower transaction volumes (particularly oil related trade finance transactions). Pre-tax profit grew by 0.9% to GHC462.7m in FY16 (FY15: 2.6%). Overall, returns remained strong, albeit the ROaE and ROaA decreased to 35.3% (FY15: 38.0%) and 4.4% (FY15: 5.1%) in FY16 respectively.
The bank maintains a highly liquid balance sheet which partly ameliorates liquidity risk given the significant contribution to deposits by wholesale clients. The bank’s cash and liquid assets (excluding mandatory reserve deposits with the central bank) amounted to 42.4% of total assets at FY16 (FY15: 38.8%).
A sustained improvement in asset quality metrics (including substantial progress in NPL workouts), as well as maintaining sound capital, liquidity and earnings metrics, would help strengthen Ecobank’s financial profile and stabilise ratings at current levels. Conversely a sustained weakening in profitability stemming from a sharp rise in loan loss provisions and delayed resolution of outstanding non-performing BDC exposures, low capital cushion and/or a marked decline in liquidity metrics, could lead to downward ratings migration.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2013)||Last rating (December 2016)|
|Long-term: AA-(GH); Short-term: A1+(GH)||Long-term: AA-(GH); Short-term: A1+(GH)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Marc Chadwick|
|Senior Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Ecobank rating reports (2013-16)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Ecobank Ghana 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 have been disclosed to Ecobank Ghana Limited with no contestation of the ratings.
Information received from Ecobank Ghana Limited and other reliable related parties to accord the ratings include:
- Audited financial results of the bank as at 31 December 2016 (plus four years of comparative figures)
- Unaudited interim results of the bank as at 30 September 2017
- Budgeted financial statements for 2017
- Latest internal and/or external audit report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Capital management policy
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, Ecobank Ghana Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Balance Sheet||Also known as a 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.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account (including taxes).|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms please click here