Ecobank Group’s new management team is actively addressing the group’s asset quality issues and moderate financial performance and has already improved the specific liquidity and capital problems of its Nigerian subsidiary.
We consider that Ecobank Nigeria remains a core subsidiary for the wider group.
Therefore, we are affirming our global scale ratings on Ecobank Nigeria at ‘B/B’ and revising our outlook to stable.
S&P Global Ratings today revised to stable from negative its outlook on Nigeria-based Ecobank Nigeria Ltd. (ENG) and affirmed its ‘B/B’ long- and short-term counterparty credit ratings on ENG.
Our outlook revision reflects our view that the Ecobank Group’s management has addressed the significant liquidity risks and is improving the capitalization and asset quality of the Nigerian business, while implementing a wider strategy of improving asset quality and financial performance around the group.
ENG is considered to be a core subsidiary within the Ecobank Group; as a result, our ratings on ENG reflect the wider group credit profile. On Dec. 31, 2016, ENG accounted for approximately 30% of total assets and loans and 46% of total adjusted capital (TAC) of the group. Furthermore, a large percentage of the group’s asset quality issues emanated from Nigeria because of ENG’s legacy problem loans and its concentrated lending in U.S. dollars to the oil and gas sector.
The financial year ending December 2016 was difficult for the group in terms of asset quality, profitability, and ultimately capitalization. Risk costs were significantly higher than we expected at year-end 2016, when loan-loss provisions reached 7.95% of average customer loans, up from 4.33% one year earlier. The group also posted a loss of $200 million in 2016. Its total comprehensive loss stood at $866 million, largely because of adverse foreign exchange (FX) movements, which significantly impaired the group’s capitalization.
We consider that the FX translation losses, combined with the reshaping of the business by the new management team and institutional shareholders, reflect the difficult macroeconomic and legacy issues in the group’s key markets, especially Nigeria. Positively, going into the first half of 2017 the group gained some momentum on strengthening control of risk and operating costs. Ultimately, this will improve the group’s bottom line.
We also view as positive the groups’ solution for stabilizing its core subsidiary in Nigeria. At the end of 2016, the group created a special-purpose vehicle named Ecobank Specialised Finance Co., which bought nonperforming legacy assets from ENG for U.S.$200 million in cash and the transfer of ownership of some property valued $66 million. This solution simultaneously helped the Nigerian subsidiary to clean its loan book, improve capitalization, and provided much-needed FX in cash to help with the tight liquidity caused by the U.S. dollar shortage in Nigeria. ENG’s capital adequacy ratio stood at 17%at the end of June 2017, improving from 15.1%, which was only 0.1% above the regulatory requirement, at end of June 2016. On June 30, 2017, the subsidiary, thanks to the use of the resolution vehicle and lines provided by other group companies, had repaid nearly all outstanding off-balance-sheet facilities and materially improved its U.S. dollar liquidity.
The resolution vehicle, domiciled in Mauritius, but with a management team based in Nigeria, will be consolidated at group level. The group has engaged with recovery firms to work on the big-ticket exposures that account for 60% of the gross exposures. The recovery figure at mid-year 2017 had reached $7.2 million, much of which was achieved in the second quarter of 2017. The target for the full year is $44.5 million. In our view, the group’s targets are ambitious and any delay in recovery could hamper the group’s financial performance over the next two years.
Our ratings incorporate our expectation that asset quality is likely to improve, but only to levels more commensurate with peers operating in high-risk economies. We still consider the group’s geographic diversification to be unique. It is clearly beneficial to its franchise value, given that the Ecobank Group has attracted strong institutional shareholders, and also provides a modicum of revenue stability.
We also believe the group’s fairly recent shift in strategy away from geographic expansion at all costs, in favour of a more-targeted, country-by-country approach should help improve profitability. We forecast that return on equity will average 10% over the next three years, compared to a negative result in 2016.
This improvement balances the impact of implementing International Financial Reporting Standards (IFRS) 9 against improved underlying risks, better control of costs, and some additional capital inputs in 2018. We also expect the improved bottom line will help stabilize capitalization, although not beyond the current weak levels, as categorized under our risk-adjusted capital (RAC) methodology, of 3.25%-3.5% through 2018-2019.
The stable outlook on ENG reflects the ratings on the Republic of Nigeria, the core status of the bank to the wider Ecobank group, and our expectation that the group’s asset quality and financial performance will improve over 2017 and2018. We fully expect the group to post improving profit and capitalization over the next 12-18 months.
We would lower the rating on ENG if we took a similar action on Nigeria, if the improvement in liquidity is reversed, if the cost of risk continues to lagrated peers, or if the bank and group fail to internally generate an improved capital position.
An upgrade is unlikely over the next 12 months, given the sovereign rating on Nigeria, but would require that the group turn its nascent advantage of geographic diversification into long-term balance sheet momentum, with performance measured through earnings stability, capital adequacy, and asset quality.
Proshare.
