Fitch Ratings, one of the three biggest rating agencies in the world, has downgraded two of the biggest banks in Nigeria, at the same time attesting to the viability of all Nigerian banks.
Fitch downgraded First Bank and United Bank for Africa’s (UBA) long-term foreign currency issuer default ratings (IDRs) to ‘B’ from ‘B+’.
Though the outlooks are stable, the agency also downgraded the national long-term rating of FBN Holdings Plc (FBNH), the parent holding company of FBN, to ‘BBB+(nga)’ from ‘A(nga)’.
On the bright side, Fitch affirmed the IDRs of eight other Nigerian commercial banks, while also affirming the viability ratings (VR) of all Nigerian banks.
The viability ratings corroborates the stance of the Central Bank of Nigeria (CBN) that no Nigerian bank is in distress.
The outlook on the long-term foreign currency IDR of Guaranty Trust Bank (GTB) has been revised to stable, from negative, due to continuing “strong earnings and stronger-than-expected liquidity”.
The senior debt ratings of Zenith, Access (issued via Access Finance BV), GTB (issued via GTB Finance BV), Diamond and Fidelity are affirmed in line with their respective long-term IDRs.
The subordinated debt ratings of FBN (issued via FBN Finance BV) and Access are rated one notch below their respective VRs to reflect higher-than-average loss severity for subordinated relative to senior debt.
GTB’s and Zenith’s VRs, which at ‘B+’ are the highest in Nigeria, are sensitive to deterioration in their financial profiles, particularly asset quality and foreign currency liquidity.
All other banks’, apart from Wema’s, Support Rating Floors (SRFs) have been affirmed at ‘B’. Wema’s SRF is affirmed at ‘B-‘, reflecting Fitch’s view of the bank’s lower systemic importance. Fitch has affirmed the IDRs of all of these banks.
Since the last review in February 2016, bank asset quality has continued to weaken with average impaired loans (NPL) ratios of about 6.2% at end-March 2016, although this is skewed by FBN’s high NPL ratio of 21.5%.
Fitch reports that impairments in banks are increasing in the commercial, trading and manufacturing segments, mainly due to foreign currency depreciation and scarcity.
NPLs in the oil sector are also rising, but most of the larger problem loans are being restructured. FBN’s high NPL ratio is mainly due to the bank’s exposure to the downstream oil sector.
Sustained low oil prices and continuing production disruptions in the Niger Delta could cause industry NPL ratios to rise more dramatically.
It is expected that loan impairments will rise in the wake of the Naira devaluation. Devaluation will primarily affect those Nigerian companies that are not adequately hedged by foreign currency income streams, and which will find it more difficult to service their foreign currency loans at the current exchange rate.
The devaluation could also affect customer demand in the domestic economy. Despite slower asset growth and higher loan impairment charges, Fitch expects banks to remain profitable in 2016 due to still strong earnings generation.
Also, Fitch expects foreign currency liquidity to remain tight in 2016 despite the new FX regime saying that naira liquidity is satisfactory.