BY MICHAEL EBOH

The recent ratings of Nigerian banks by both local and international rating agencies  has raised the questions of how the ratings will affect and be translated to improved profitability of the affected banks and how effectively they will meet the expectation of shareholders and other stakeholders.

Stakeholders are however, optimistic that the ratings will have a positive effect on return on investment, boost the banks’ top and bottom line and also impact positively on the banking sector, in general. Fitch, in a commentary titled, ‘Nigerian Banks: Key Rating Drivers for the Sector,’ said that Nigerian banks’ long-term ratings are constrained by an extremely challenging operating environment, concentrated credit risk and weak albeit improving corporate governance and transparency requirements.

According to Fitch, the drivers for the ratings of the various Nigerian banks are either based on the banks’ individual credit strength or the perceived probability of support from the state or institutional parent. It said, “Inefficient operations remain a characteristic of the market that Nigerian banks will need to address in order to ensure their long-term-sustainability.”

Earlier in the year, in an apparent affirmation of the financial strength and the solidity of the Nigerian financial services sector, Standard & Poor’s, S&P,  Rating Servicesrevised the outlook on three Nigerian banks — First Bank of Nigeria Plc, Zenith Bank Plc and Guaranty Trust Bank Plc — to positive, from stable.

In its rating of the banks, S&P said the positive outlook largely reflected the banks’ stand-alone credit profiles and the outlook on the sovereign.

CBN Gov, Sanusi Lamido

It added that the raising of the Nigeria national scale long-term ratings was based on its expectations that improvement in the economic environment would have a positive effect on the banks’ financial performance, translating into lower cost of risk and continued focus on bad debt recovery. Also, S&P, last week, upgraded First City Monument Bank, FCMB, rating to stable, while F, S&P and Agusto all upgraded their rating on Access Bank Plc.

In rating FCMB, S&P said it reflects its expectation that that the next two years will see stable economic growth, with minor currency fluctuations. It also expressed optimism that the merger with Finbank Plc is expected to improve FCMB’s business position through local market diversification and a larger branch network and deposit franchise.

“It added, however, “Our opinion of FCMB’s business position would improve if the bank continued to increase its market share and improve its competitiveness, thereby creating a sustainable track record of revenue stability. We expect better risk management and a stable economic climate to lead to signs of improvement in the risk position during the next two years.”

In an analysis of Access Bank’s rating, the agencies revealed major upgrades which are attributable to the bank’s improved market position, strong capitalization and strong liquidity profile; enhanced distribution network and expanded client base.

According to opinions expressed on Access Bank by one of the rating agencies, “Access Bank’s funding has been strengthened by an enlarged branch network following consolidation, which has availed the Bank a vast pool of low-cost deposit”.

It stated further that, “In the year under review, local currency deposits grew by 114 per cent to N871 billion. Deposits adequately funded the loan book and Access Bank’s liquidity ratio stood at 74 per cent as at December 31, 2011, well above the regulatory minimum of 30 per cent”.

Similar to S&P’s opinion, analysts say Access Bank’s improved rating is attributable to its strong liquidity and funding position, which is a clear affirmation of its position as one of Nigeria’s tier one Banks and corroborated by its enhanced capacity to execute larger transactions as well as access long-term funding from foreign multilateral agencies and institutions.

According to the analysts, the current ratings assigned Access Bank is not materially different from other Tier 1 Banks – First Bank, Zenith, GT Bank, Access Bank and UBA. Analysts are optimistic that the rating will create expectation about the future of the bank and its re-articulated corporate vision and mission which has resulted in novel approach to banking operations.

While all the banks rated, with the exception of FCMB, recorded impressive financial performance in their 2011 results, the banks assured of a significant improvement in their 2012 financial performance and beyond.

For instance, First Bank gross earnings grew by 42.5 per cent to N92.3 billion in its first quarter ended, March 31, 2012, financial statement, from N64.8 billion recorded in the same period in 2011; operating income rose by 50.2 per cent to N74.2 billion from N49.4 billion in first quarter 2011, while its profit before tax grew by 101.6 pecent to N28.9 billion from N14.3 billion in 2011.

GTBank in its first quarter 2012 financial performance, recorded profit after tax of N19.312 billion, rising by 35 per cent from N14.328 billion recorded in similar period in 2011;  Zenith Bank declared a profit after tax of N19.2 billion for the quarter, representing an increase of 26 per cent from N15.3 billion recorded in the same period in 2011.The rating agencies are of the view that capital is becoming increasingly tight in the sector, with little appetite for fresh equity issuances.

According to Fitch, this means that current levels of capital are unlikely to be sufficient to support any material asset growth in the industry. As the second quarter results of the banks are been expected, shareholders and other stakeholders await the impact the ratings will have on the banks’ performance in the 2012 financial year and beyond.