Business
Ecobank Nigeria Maintains Its “B-/B” Ratings, Per S&P Global
Ecobank Nigeria Maintains Its “B-/B” Ratings, Per S&P Global
Ecobank Nigeria’s long- and short-term issuer credit ratings have been reaffirmed by Standard and Poor’s (S&P), a reputable international rating agency. This affirmation signifies the bank’s current ability to fulfill its financial obligations despite the challenging business, financial, and economic landscape in the country. However, the agency has also highlighted potential concerns, particularly regarding the impact of currency depreciation on the bank’s regulatory capital adequacy ratio (CAR), given its relatively narrow capital buffers. Consequently, S&P has revised the outlook to negative from stable while maintaining the ‘B-/B’ ratings on Ecobank Nigeria.
NewsReport gathered that a recent report by the rating agency sheds light on the adverse effects of foreign exchange (FX) shortages and the weakening naira on banks in Nigeria, including Ecobank Nigeria. It underscores the continued strain that FX scarcities are likely to exert on key sectors of the economy throughout 2024, despite efforts by the Central Bank of Nigeria (CBN) to address the FX backlog.
Of particular concern is the high proportion of foreign currency loans, which account for 65 percent compared to an estimated 55 percent for the sector following naira depreciation in June 2023. This situation poses additional credit risks within Nigeria due to the scarcity of U.S. dollars. The report also anticipates adjustments in the level of collateral on Ecobank Nigeria’s letters of credit due to the weaker naira, with the bank having increased its provisions by 166 percent in the third quarter of 2023 compared to the same period in 2022, resulting in a cost-to-risk ratio of 1.8 percent.
While the agency anticipates that the bank will meet its capital requirements, it also underscores its potential vulnerability to a sharp depreciation of the naira, which could undermine its regulatory capital adequacy ratio. The exchange rate dynamics, now closer to a managed float and more aligned with market demand, coupled with weak supply fundamentals, further complicate the situation.
S&P has highlighted the potential consequences if the minimum CAR were breached, indicating a 30-day window for the bank to restore its capital buffer. Failure to do so would trigger an acceleration of payments on outstanding Eurobonds amounting to $300 million, significantly increasing pressure on the bank’s FX liquidity position.
The ‘B-/B’ ratings on Ecobank Nigeria reflect its core status within the Ecobank group, underscoring its integral role in the parent company’s future strategy. S&P derives its rating on the bank from the ‘b’ group credit profile of the Ecobank group.
Looking ahead, S&P has indicated that it would consider revising the outlook on Ecobank Nigeria to stable over the next 12 months if the bank’s capitalization improves and its regulatory capital buffers strengthen. Conversely, a negative rating action could occur if the bank breaches its minimum CAR due to higher credit losses than forecasted or if U.S.-dollar-denominated contingent sources of funding and liquidity are impeded amid FX shortages in Nigeria. Additionally, a negative rating action on Nigeria could also lead to a lowering of the rating on Ecobank Nigeria.
In conclusion, S&P’s recent assessment underscores the challenges and potential risks facing Ecobank Nigeria within the current economic landscape. While the bank has demonstrated resilience, the report highlights the importance of capitalization and regulatory buffer strength in navigating the evolving financial environment. The coming months will be crucial as the bank works to address these concerns and solidify its position within the market.
