Standard and Poors (S&P), a global rating agency has affirmed its ‘B-/B’ long- and short-term issuer credit ratings on Ecobank Nigeria. This implies that the Bank currently has the capacity to meet its financial commitment on obligations despite the adverse business, financial, and economic conditions prevalent in the country. However, the agency stated that Further potential depreciation of the naira could undermine the bank’s regulatory capital adequacy ratio (CAR), given its thin capital buffers. Therefore, “we revised the outlook to negative from stable and affirmed our ‘B-/B’ ratings on Ecobank Nigeria,” it stated.
The Rating agency had in its recent report observed that banks in the country including Ecobank Nigeria were being negatively impacted by foreign exchange (FX) shortages and weaking naira. It added that FX scarcities will continue to weigh on key sectors of the economy through 2024, despite the Central Bank of Nigeria (CBN)’s efforts to clear the FX backlog.
“The high level of foreign currency loans — at 65 percent compared to a 55 percent estimate for the sector, following naira depreciation in June 2023–poses additional credit risks in Nigeria due to the scarcity of U.S. dollars.”
“Because of the weaker naira, we expect Ecobank Nigeria to adjust the level of collateral on its letters of credit. The bank increased its provisions 166 percent in third-quarter 2023 from third-quarter 2022 with a cost of risk ratio of 1.8 percent.”
“Although we expect the bank to meet its capital requirements, a potential sharp depreciation of the naira could undermine its regulatory capital adequacy ratio” “While the naira trades closer to a managed-float rather than being a fully free-floating currency, the exchange rate is now significantly more in line with market demand — at about N850-N950 per $1 — and supply fundamentals, which remain weak.”
The agency said it understands that if the minimum CAR were breached, the bank would have 30 days to restore its capital buffer. If it was not restored, this would trigger acceleration of payments on the outstanding Eurobonds, amounting to $300 million, stressing that such an event could materially increase pressure on the Bank’s FX liquidity position.
According to the agency, ‘B-/B’ ratings on Ecobank Nigeria reflect its core status to the Ecobank group. “This reflects the bank’s integral role in its parent’s future strategy. S&P derives its rating on the bank from ‘b’ group credit profile on the Ecobank group.”
S&P further confirmed that it would revise the outlook on Ecobank Nigeria to stable over the next 12 months if the bank’s capitalisation improves, and its regulatory capital buffers increase. “We would take a negative rating action over the next 12 months if the bank breached its minimum CAR due to higher credit losses than we forecast, and if U.S.-dollar-denominated contingent sources of funding and liquidity were hindered amid FX shortages in Nigeria. We would also lower our rating on Ecobank Nigeria if we take a negative rating action on Nigeria.”
