By Blaise Udunze
Two Systemically Important Banks (SIBs), First Bank and United Bank for Africa (UBA), received hard knocks from global rating agency, Fitch Ratings, on Tuesday with FBN taking a hit over its weak foreign currency position.
In the report, the agency downgraded the credit ratings of FBN and UBA’s long-term foreign currency Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’. It also downgraded the national long-term rating of FBN Holdings Plc (FBNH), the parent holding company of FBN, to ‘BBB+(nga)’ from ‘A(nga)’.
The two banks’ downgrade may not be unconnected to their huge exposure to oil and gas sector, as Fitch noted that, “FBN’s high NPL ratio was mainly due to its exposure to the downstream oil sector.”
Since the last review in February 2016, banks’ asset quality had continued to weaken with average impaired loans (NPL) ratios of about 6.2 per cent at end-March 2016, although this is skewed by FBN’s high NPL ratio of 21.5 per cent.
This is also coming less than one week after the Central Bank of Nigeria (CBN) Director, Banking Supervision, Mrs. Tokunbo Martins, confirmed that “one or two” commercial banks had failed liquidity tests but noted they were not in the same situation as Skye Bank.
The agency raised the alarm that impairments in banks were increasing in the commercial, trading and manufacturing segments, mainly due to foreign currency depreciation and scarcity, while NPLs in the oil sector are also rising although most of the larger problem loans are being restructured.
According to Fitch, the country’s ability to provide support, particularly in foreign currency, is weaker due to falling oil prices which is eroding Nigeria’s foreign exchange reserves and foreign currency revenues.
Fitch at the same time affirmed the IDRs of eight other Nigerian commercial banks and affirmed the Viability Ratings (VR) of all the banks. The outlook on the long-term foreign currency IDR of one of the banks, Guaranty Trust Bank (GTB), has been revised to stable from negative due to continuing strong earnings and stronger-than-expected liquidity.
The agency, however, explained: “Our rating actions followed the downgrade of Nigeria’s sovereign ratings on June 23, 2016, while the key rating drivers were IDRS, Support Ratings and Support Rating Floors (SRFs).”
The agency, however, explained that the IDRs of UBA, Access Bank and Wema Bank are driven by both their standalone strengths reflected in their VRs, and by the likelihood of sovereign support, reflected in their SRFs, saying, “their VRs and SRFs are at the same level.”
“The IDRs of FBN, Diamond Bank (Diamond), Fidelity Bank (Fidelity), Union Bank (Union) and First City Monument Bank (FCMB) are driven by their SRFs,” it stated further.
Fitch said it has revised the SRFs to ‘B’ from ‘B+’ for the SIBs, including FBN, UBA, Zenith and GTB following the downgrade of Nigeria’s sovereign ratings. As a result, both FBN’s and UBA’s IDRs have been downgraded to ‘B’ from ‘B+’.
“The IDRs of both Zenith and GTB are affirmed at ‘B+’ and are now driven by their respective VRs of ‘B+’. The SIBs’ SRFs remain a notch below the sovereign rating, reflecting the sovereign’s weak foreign currency position,” the agency said.
It, however, said the negative outlook on FBNH’s long-term IDR reflects pressure on its subsidiary FBN’s VR. VRs (all banks apart from Stanbic IBTC and Standard Chartered), explaining that the challenging and volatile operating environment in Nigeria and other key rating factors, particularly the banks’ financial profiles, constrain the VRs in the highly speculative ‘B’ range.
Meanwhile, Fitch’s report hinted that all other banks’, apart from Wema’s, SRFs have been affirmed at ‘B’.
It, however, affirmed that despite slower asset growth and higher loan impairment charges, Fitch expects banks to remain profitable in 2016 due to still strong earnings generation.
According to the rating agency, strong regulatory capital ratios have helped offset the one-off impact from the devaluation arising from Nigeria’s new forex regime.
It further said, “despite the new forex regime, Fitch expects foreign currency liquidity to remain tight in 2016, particularly as supply has not increased dramatically. Some banks have accumulated sufficient foreign currency liquidity to meet 2016 maturities and we believe that they are managing their liquidity risks commensurately with their VR levels, but refinancing risk on the banks’ foreign currency obligations remains high. Naira liquidity is satisfactory.”