June 12, 2009

Nigerian banks stable —Fitch

By Omoh Gabriel,  Business Editor
Fitch yesterday released the full assessment of 11 of the 24 banks operating in the country downgrading some from positive outlook to stable outlook.

Almost all the banks were rated stable by Fitch.

It, however, warned that tighter liquidity, increased currency volatility and weaker asset quality were expected to negatively affect 2009 earnings of banks in the country.

It said: “Given the various issues facing the sector, the following rating actions were taken during 2008: the Outlooks on Guaranty Trust Bank Plc and Zenith Bank Plc were revised to Stable from Positive; Access Bank’ National Long term rating was downgraded to ‘BB ’(nga); Ecobank Nigeria Plc’ IDR was downgraded to ‘ ’ from ‘’ and Union Bank Plc’ Individual rating was downgraded to ‘/E’from ‘’

“Should the risks from very rapid credit growth or the exposures to share backed lending lead to significantly higher impairments, this could result in rating pressure.”

The rating of the 11 banks ranged from AAA to BBB, meaning that the banks are in stable financial condition in the short and long run.

The banks rated and their ratings as at June 2009 are  Stanbic IBTC Bank PLC AAA(nga) NR a; Guaranty Trust Bank PLC AA (nga) B+/Stable Outlook; Zenith Bank Plc AA (nga) B+/Stable Outlook; First Bank of Nigeria Plc A+(nga) B+/Stable Outlook; Intercontinental Bank Plc A+(nga) B+/Stable Outlook; United Bank For Africa Plc A+(nga) B+/Stable Outlook; Union Bank of Nigeria PLC A+(nga) B+/Stable Outlook; Diamond Bank Plc A (nga) B/Stable Outlook; Oceanic Bank International Plc BBB+(nga) B/Stable Outlook; Ecobank Nigeria Plc BBB (nga) B /Stable Outlook; Access Bank Plc BBB (nga) NR; a NR meaning Not Rated

Fitch in its 2009 report on Nigerian Banks said “2008 marked the end of a period of rapid expansion for the Nigerian banking sector with the onset of the global credit crisis and lower oil prices causing a weakening in the operating environment. How the sector deals with the excesses built up in recent years will be a feature for the next couple of years. However, the systemwide consolidation in 2005/2006 when the banks’ minimum capital requirements were raised significantly has better positioned the sector to absorb these risks and a slower period of growth would be a positive development.

“Share backed lending has emerged as an important risk consideration following the collapse in share prices since early 2008 and is going to have to be absorbed in some form. The Central Bank of Nigeria (CBN), which estimates the sector wide exposure to be about N 800 billion 1.200 trillion at the end of 2008, has allowed banks to reschedule these obligations, without classifying them as non performing. Sector”

According to the Agency “Another area of pressure has been system liquidity. Risk aversion has seen foreign funds being withdrawn, although this was not significant in the first place, and there has been some evidence of a flight to quality due to market concerns about share lending exposures. In response, the CBN has reduced the minimum regulatory liquidity requirements on a number of occasions. While some banks may be under more pressure than others, liquidity in the system appears adequate and Fitch Ratings expects loan to deposit ratios to moderate as loan growth slows.

“The various risk concerns in the banking system have highlighted the issue of information disclosure deficiencies. While this has improved as banks have sought to access the international capital markets, the sector still has some way to go and is lagging other emerging markets in this respect and would benefit from the introduction of IFRS and a uniform accounting financial year.

“In spite of the environment, Nigerian banks continued to report strong earnings growth in 2008 due to rapid credit growth and the agency expects growth to continue in 2009, although it will be lower. Rapid growth has masked the increasing risk in the system and we expect impaired loans to rise as the economy slows.

The report said “Transparency is weak in Nigeria although there have been improvements in some of the more internationally active institutions.

With the exception of GTB, bank financial statements are only presented in local GAAP. While Fitch recognises that Nigerian GAAP do not require the same levels of detailed disclosure as IFRS, the agency notes that most Nigerian banks do not provide supplementary information of their Tier 1 and total capital adequacy ratios and detailed information regarding their loan portfolios in their annual reports.

First Bank was the only bank in the sector to disclose its share lending exposure at end 2008 in its annual report. Share backed and margin lending have become a feature of many Nigerian banks over the past two years. The CBN estimated sector wide exposure to this type of lending to be about N 800 billion N1.200 trillion at end 2008.

According to the CBN, this represented 30 per cent 45 per cent of system wide share holders’ funds in 2008. Of this amount, the CBN estim
ates that about N 400 billion related to margin lending. These facilities are primarily to individuals and stock brokers for the purpose of acquiring shares.

“Fitch makes the distinction between margin lending and share backed loans to corporates for the purpose of acquiring shares, with the former considered to be far riskier because of the counter parties’ reliance on favourable share performance in order to repay the loan. At the same time, Fitch is aware that stockbrokers in Nigeria tend to hold relatively low levels of capital. Share backed loans to corporates are considered to be less risky as their cash flows and consequent ability to repay these loans are dependent on the underlying operations of the company.

“The earnings of the Nigerian banks continued to grow strongly during 2008 financial year on the back of improvements in net interest and non interest income following expansion of the banks’ loan and depositor books. Net earnings increased by 60 per cent to 165 per cent in the Fitch rated banks, with many of these institutions doubling their post tax profits during 2008.

This growth was supported by high levels of GDP growth and stable but increasing inflation for most of the year. These improved earnings do not reflect the potential impairment charges that the banks may incur as a result of exposures to share lending.

“The economic effects of the global financial crisis are expected to affect the Nigerian economy more significantly during 2009, with GDP growth expected to slow to about 3 per cent on the back of lower oil prices.

Tighter liquidity, increased currency volatility and weaker asset quality are also expected to negatively affect 2009 earnings. The sector recorded improved financial performance indicators, with the 11 Fitch rated banks reporting a return on average assets of between 2.3 per cent to 4.1 per cent during 2008 financial year.

Similarly return on average equity ranged from 15.0 per cent to 23.1 per cent during the period.”