The Nation Newspaper

Tag: Fitch

  • ‘Fitch’s Nigeria downgrade belated’

    The recent downgrade of Nigeria’s sovereign rating by Fitch Ratings, one of the global rating agencies, failed to take cognizance of the improvements in the Nigerian economic cycle and the bright spots in the medium to long-term, a leading investment and research firm, Afrinvest Securities, has said.

    Barely a week after Nigeria remarkably moved its foreign exchange (forex) policy from a fixed regime to a market driven two-way quote interbank system, Fitch Ratings downgraded Nigeria to ‘B+’-highly speculative non-investment grade, with a Stable outlook from ‘BB-‘-speculative investment grade, with negative outlook. The downgrade by Fitch brings its sovereign rating for Nigeria into alignment with peers – S & P, ‘B+’; and Moody’s, ‘B1’.  Fitch also downgraded Nigeria’s long-term foreign currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-’ and long-term local currency IDR to ‘BB-’ from ‘BB’.

    Afrinvest Securities noted that while Fitch deemed the pace, scope and scale of policy responses to the external shocks arising from oil price crash inadequate to sufficiently rebalance the economy, its downgrade lagged behind the economic cycle and failed to take into consideration recent improvements in Nigeria’s macroeconomic space.

    “We believe the recent Fitch Ratings’ downgrade is belated and lags behind actual movement in economic cycle which, by consensus including Fitch, could improve in the medium to long term due to policy realignment in the forex market, fiscal reforms to wean the economy off oil-price dependency and ongoing restructuring of the Nigeria National Petroleum Corporation (NNPC),” Afrinvest Securities stated.

    Afrinvest Securities added that while it shares Fitch’s view that the economy will contract in second quarter of the year and current account deficit would widen, there are indications that government revenue will improve due to recent foreign exchange rate movement and renewed drive to boost non-oil revenue.

    The research and investment firm also noted that fresh revelation by Reuters indicated that Nigeria’s oil exports have been more resilient than what news of militants’ attacks on production facilities suggest. As against media claims of 1.37mbpd production in May, oil exports declined slightly by 62,000bpd to 1.89mbpd in May according to Windward – a global maritime data and analytics company – and by 100,000bpd to 1.77mpbd according to Reuters.

    Fitch, in the downgrade, acknowledged some underlying fiscal strengths of the economy, mainly the low level of government debt to GDP below ‘B’ rated countries median of 53 per cent and government’s fiscal adjustment strategies to curtail recurrent expenditure growth and raise non-oil revenue; notably through reforms in the NNPC and petrol subsidy removal, implementation of the Treasury Single Account (TSA), and implementation of information systems to remove “ghost workers” from public payroll.

    The key areas of vulnerabilities identified by Fitch however included renewed agitation in the Niger Delta region which has pared oil production with impact on trade balance and foreign exchange earnings, deteriorating debt ratios as Fitch has forecasted government debt to revenue ratio to increase 259 per cent in 2016 from 181 per cent in 2015, higher than 223 per cent median for rated peers, shortage of foreign currency liquidity due to erstwhile pegged exchange rate regime and political and security risk emanating from insurgencies in the North and Niger Delta regions as well as sectarian tensions.  Fitch noted that these have had negative feedbacks on domestic economic growth, fiscal revenue, inflation rate, and external sector balances.

    Fitch predicts another economic contraction in second quarter of 2016 and estimates that current account deficit will widen to 3.3 per cent of GDP in 2016 from 2.6 per cent in 2015.

  • Fitch rates Nigerian banks well on devaluation effect

    Fitch rates Nigerian banks well on devaluation effect

    Nigerian banks are sufficiently well capitalised to absorb the impact of the 40 per cent effective devaluation of the Naira against the US dollar, Fitch Ratings stated in a release on Thursday.

    The Central Bank of Nigeria (CBN) on Monday started the implementation of its new flexible foreign exchange (forex), leaving the Naira to float freely with market forces.

    Fitch explained that currency devaluation affects banks’ capital ratios largely because total risk-weighted assets are inflated when foreign currency (FC) assets are translated back into naira, while capital is denominated in local currency.

    The global rating agency assigned ratings to 10 Nigerian banks and its assessment was that, with a 40 per cent effective devaluation, the majority will not face an immediate breach of regulatory capital adequacy ratios (CARs).

    However, if the naira continues to weaken, buffers between minimum and reported CARs may decline to a level which heightens ratings sensitivity.

    Fitch-rated banks report CARs ranging from 14 per cent to 21 per cent. The devaluation will impact ratios in different ways across rated banks, depending on the level of their FC risk-weighted assets and the size of their net open FC positions. On average, 45 per cent of net lending in the Nigerian banking sector is extended in FC, almost entirely US dollars. Balance sheets tend to be reasonably well-hedged, although CARs are primarily affected by the revaluation of their FC risk-weighted assets into Naira.

    “In our view, the immediate impact of effective devaluation on CARs reported by Fitch-rated banks will be a two per cent average reduction. Any erosion of capital ratios may be short-lived because banks are profitable despite the unfavourable operating environment. Rated banks reported a 14 per cent average return on equity in first quarter of the year. Expectation is that dividend pay-outs will probably be conservative in 2016, while internal capital generation is expected to remain healthy,” Fitch stated.

    The report however noted that banks’ ability to continue to generate solid performance indicators will largely depend on developments in asset quality and loan impairment trends, pointing out that impaired loans represented an average of 5.5 per cent of gross loans across our portfolio of rated banks at the end of first quarter 2016, which is reasonable considering the tough operating environment.

    “Loan loss cover is adequate for most banks, but it expect impaired loan ratios to rise in the wake of the naira devaluation. This is because some Nigerian corporates are not adequately hedged by FC income streams and may find it more difficult to service their FC loans. Most major Nigerian corporates are well hedged,” Fitch stated.

    According to Fitch, the success of the forex move in attracting portfolio inflows and foreign direct investment has yet to be tested but if successful, and FC supply rises, FC liquidity for banks will ease which would allow them to meet FC demand, and meet their internal and external FC obligations.

  • Nigerian banks are strong, says Fitch

    Nigerian banks are strong, says Fitch

    •Downgrades economy to ‘B+’

    Fitch Ratings has said Nigerian banks are well capitalised to absorb the impact of the 40 per cent effective devaluation of the naira against the dollar. It said currency devaluation affects banks’ capital ratios largely because total risk-weighted assets are inflated when foreign currency (FC) assets are translated back into naira, while capital is denominated in local currency.

    It assigned ratings to 10 Nigerian banks and its assessment is that, with a 40 per cent effective devaluation, the majority will not face an immediate breach of regulatory capital adequacy ratios (CARs). However, if the naira continues to weaken, buffers between minimum and reported CARs may decline to a level which heightens ratings sensitivity.

    Fitch-rated banks report CARs ranging from 14 per cent to 21 per cent. The devaluation will impact ratios in different ways across rated banks, depending on the level of their FC risk-weighted assets and the size of their net open FC positions. On average, 45 per cent of net lending in the Nigerian banking sector is extended in FC. Balance sheets tend to be reasonably well-hedged, although CARs are primarily affected by the revaluation of their FC risk-weighted assets into naira. “In our view, the immediate impact of effective devaluation on CARs reported by Fitch-rated banks will be a two per cent average reduction,” Fitch said.

    Meanwhile, Fitch Ratings has downgraded Nigeria’s Long-term foreign currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-’ and Long-term local currency IDR to ‘BB-’ from ‘BB’. The outlooks are stable. The issue ratings on Nigeria’s senior unsecured foreign-currency bonds have also been downgraded to ‘B+’ from ‘BB-’.

    The Country Ceiling has been revised down to ‘B+’ from ‘BB-’ and the Short-Term Foreign-Currency IDR affirmed at ‘B’. It said the downgrade of Nigeria’s IDRs reflects the following key rating drivers: Nigeria’s fiscal and external vulnerability has worsened due to a sharp fall in oil revenue and fiscal and monetary adjustments that were slow to take shape and insufficient to mitigate the impact of low global oil prices.

    Renewed insurgency in the Niger Delta in first half of this year has lowered oil production, magnifying pressures on export revenues and limiting the inflow of hard currency. Fitch forecasts Nigeria’s general government fiscal deficit to grow to 4.2 per cent in 2016, after averaging 1.5 per cent in 2011 to 2015, before beginning to narrow in 2017.

  • Fitch upgrades Access Bank’s credit rating

    Fitch upgrades Access Bank’s credit rating

    Access Bank Plc yesterday announced an upgrade of its national scale credit rating by Fitch Ratings.

    Fitch Ratings, a global leader in credit ratings and research, has affirmed the Long-term IDRs of Access Bank Plc (Access) and upgraded the National Ratings. The National Rating of the Bank has been upgraded to ‘A(nga)’/‘F1(nga)’ from ‘A-(nga)’/‘F2(nga)’ to reflect the improvement in creditworthiness over time relative to peers and to the best credits in Nigeria.

    In Fitch’s opinion, banks will continue to face multiple threats in the course of 2016, particularly from tight foreign currency liquidity, worsening asset quality and pressure on regulatory capital ratios. However, Access’ Viability Rating (VR) is affirmed as these risks are to a large extent already captured in the ratings.

    The Long-term Issuer Default Ratings (IDR) of Access remains on Stable Outlook as the rating is driven by its Viability Ratings (VR) and there is no expectation of any material change in the Bank’s intrinsic creditworthiness.

    Access’ Support Rating Floor (SRF) of “4” reflects the authorities’ unchanged ability and willingness to provide extraordinary support. The agency believes that while there is a limited probability of external support, the authorities have a stronger ability to support the bank’s local currency obligations if required.

    The senior debt rating of Access (issued via Access Finance BV) is in line with its long-term IDR. The senior debt rating is affirmed due to the affirmation of the bank’s long-term IDR.

    Access Bank’s major strengths, which underpin its long- and short-term ratings, include its size and franchise, its strong risk management and the group’s solid capitalization.

    The bank’s improved rating further reinforces its resolve to deliver leading innovative and differentiated products and services to its customers in its quest to become the world’s most respected African bank by 2017.

  • Fitch: Nigeria’s oil response has fiscal, growth risks

    Nigeria’s response to the oil price shock is focused on achieving state-led development that would boost economic growth and import substitution, Fitch Ratings agancy, has said

    The rating agency said it is not yet clear if the associated measures taken by government will promote growth while containing fiscal pressures.

    It however, insisted that there are a number of downside risks.

    The agency said emerging economic policy under President Muhammadu Buhari, includes an increase in public spending and state-directed investment, revenue-side reforms, and accommodative monetary policy.

    It said the 2016 budget envisages spending of N6 trillion, up from N4.6 trillion in the 2015 budget, including a 30 per cent increase in capital spending.

    It said the government aims to finance additional spending through revenue-side reforms, including improved tax collection and public finance management, as well as increase external financing.

    Fitch said the fall in oil prices below the $38/barrel level assumed in the 2016 budget, has increased the need for external financing, stating that government recently announced it is looking to the World Bank and African Development Bank (AfDB) for additional lending and is also exploring a Eurobond issuance sometime in June.

    According to the agency, the Central Bank of Nigeria (CBN), took a large role in implementing economic policy during last year’s six-month wait for cabinet appointments.

    It introduced exchange controls and restrictions on foreign currency and resisted pressure for further naira devaluation. The CBN cut benchmark rates by 200bp in November and reduced the cash reserve ratio for commercial banks.

    The CBN, it added,  has continued to restrict access to forex in 2016, limiting dollar sales to Bureau de Change operators. It has maintained its support of the naira rather than risk the inflationary impact of devaluation.

    Overall, Fitch Ratings said these policies present downside risks to Nigeria’s sovereign credit profile, although there are various mitigating factors: Increased borrowing and higher interest payments would add to pressure on the fiscal position.

    It said public debt is low, and the government is unlikely to fully execute its spending plans. Capital expenditure, for example, has constituted only about 20 per cent of total federal government spending in recent years and is estimated to have dropped to about 13 per cent for 2015.

    It sad erosion of fiscal and external buffers and policy uncertainty drove our revision of the Outlook on Nigeria’s ‘BB-’ sovereign rating to Negative in March 2015, which we affirmed in September.

  • ‘Shadow banking’ growth to slow down, says Fitch

    The growth and success of shadow banks will begin to modestly slow in 2016 as regulators step up scrutiny of the sector and banks weigh competitive responses, according to Fitch Ratings. Shadow banks are increasingly likely to become victims of their own success, which will translate into incrementally slower growth, increased operating costs and the beginning of a gradual convergence with the very banks they are aiming to disintermediate.

    The types of entities that may be affected include consumer finance companies, mortgage originators and servicers, installment lenders, marketplace lenders and alternative investment managers and funds, among others. Many regulators are balancing their risk oversight responsibilities with ensuring the availability of credit to consumers and commercial enterprises. Shadow banks broadly perform credit intermediation outside the traditional banking framework, sometimes filling voids banks are unwilling or unable to fill.

    “We expect traditional banks to continue their collaborative approach with shadow banks, at least in the near term, partnering with or lending to them, as a means of participating in their success and gaining technological and strategic intelligence. While this facilitates the growth of a competitor, it allows traditional banks to participate in a potential growth opportunity without attracting the same levels of typical regulatory scrutiny. These partnerships could also provide traditional banks with valuable intelligence on the evolving “fintech” landscape, which could inform their competitive responses over the longer term,” Fitch said.

    JPMorgan’s recently announced partnership with OnDeck Capital to offer small loans designed for small business customers is one of several examples of banks’ collaborative approach. Providing lending (e.g. warehouse facilities, bank lines) is another way for banks to indirectly enjoy the benefits of shadow banks’ success. Banks often lend in senior, secured positions, which may moderate, but not eliminate, their potential losses.

  • Fitch cuts MTN’s credit rating

    MTN Group Ltd.’s credit rating was cut one level by Fitch Ratings Ltd. because of the increased risk that Africa’s largest phone company faces in its two biggest markets, Nigeria and South Africa.

    The rating was cut to BBB-, Fitch Ratings said in a statement on Thursday. The outlook was raised to stable from negative.

    In Nigeria, Africa’s largest economy, the telecommunications regulator has fined MTN $3.9 billion for failing to switch off unregistered mobile-phone customers, which was revised down from an original penalty of $5.2 billion. South Africa’s credit rating was cut by Fitch last week because of a worsening growth outlook that threatens fiscal credibility.

    ”These changes result in increased credit risk to MTN given its reliance on emerging markets and its exposure to South Africa and Nigeria, in particular,” Damien Chew, an analyst at Fitch, said in the statement. “An upgrade is unlikely in the short term due to MTN’s significant exposure to countries with high political and regulatory risk.”

  • Fitch revises Nigeria’s outlook to negative

    Fitch Ratings has revised Nigeria’s outlook from stable to negative owing to what it described as political uncertainty in a tightly contested election and other issues that may arise after the polls, as well as low oil prices.

    But it has taken into account the earlier polls delay as well as security challenges in its latest rating. It will be recalled that the agency published a rating of BB- with a stable outlook for Nigeria on December 7, 2014.

    However, the rating agency reaffirmed Nigeria’s long-term foreign and local currency credit rating at BB- and BB respectively citing drop in oil prices.

    At the same time, Fitch acknowledged that the government has made gains on the security front, adding that the election has gone largely well except for technical glitches.

    According to Fitch, the negative outlook could be returned to stable following a smooth electoral process and reduced political uncertainty among other factors.

    The agency noted the government’s timely and rapid policy response in the face of falling oil prices, which includes revenue increases and cost cutting measures and strengthening tax administration.

    Furthermore, it stated: “The Nigerian authorities have implemented a rapid policy response including exchange rate reform and significant fiscal consolidation, in response to lower oil prices.

    “Distortions arising from a multiple currency practice have been eliminated through the closure of the auction windows,” the agency added.

    On debt, Fitch pointed out that Nigeria’s public and external debt ratios remain stable and low when compared to its peers.

    “Debt is well managed. There is a diverse local investor base and local debt is expected to remain in key global bond indices. Debt service ratios are also low.”

    Fitch sounded a note of caution saying that economic performance is likely to weaken partly due to the erosion of fiscal and external buffers and a high dependence on oil for revenue.

    It however said that non-oil growth will remain robust while reforms in power and agricultural sectors will help to keep the momentum. It put non-oil growth forecast at 5.5 percent for 2015 from 7.4 percent in 2014 and an average of 5.6 percent over the past five years.

    Nigeria is currently rated Ba3 (equivalent to BB-) with stable outlook by Moodys and B+ with stable outlook by Standard & Poor’s.

  • Fitch fetish

    Fitch fetish

    THE Jonathan administration has quite typically, been on the defensive to the latest averments by Fitch describing the Nigerian economy as “stable but non-productive”. The global rating agency had observed in its latest report on the economy that “Nigeria’s ratings remain constrained by weak governance, low per capita income and vulnerability to oil price volatility.

    “Data weaknesses” the agency would further note, “hamper the monitoring of economic and fiscal performance and reform progress”.

    It says of the key drivers of the economy that nothing has changed in any appreciable sense. GDP growth is said to have slowed to 6.4% in the first quarter although the overall picture was one of resilience, particularly in the aftermath of the severe floods of 2012 and the effects on agricultural output. Yet again, the security situation in the North came up for mention; so is oil theft and vandalism which eventuated in shutdowns, leading to contractions in oil output for the second year in a row.

    In 2012, the non-oil sector grew by 7.9%. By the first quarter of 2013, this slowed to 7.6% – a rate expected to pick up in second quarter “as normal weather resumes and the authorities respond to security problems. Reforms to the electricity and agriculture sectors could start to boost potential growth. Inflation has remained at single-digit – the lowest in five years, and the longest stretch in that single digit since 2008.

    To finance minister Ngozi Okonjo-Iweala, the findings are nothing to worry about. According to her, “What’s important about the ratings is that while acknowledging all the challenges the economy faces, it points to and applauds the strengths such as progress in the power sector, increased focus on agriculture, strong investment in local manufacturing and other areas”.

    To start with, we must say that there is very little in the latest report by Fitch on the economy that Nigerians are not already familiar with. By now, number-numbed Nigerians ought to have grown weary of the claims of outlandish growth that has left more people impoverished than it has been able to lift out of poverty. That is, if it is not more worrisome that the same old problems of weak governance, poor attention to the critical linkages in the economy, and the pathetic indifference to the challenge of physical infrastructure and security of lives and property which have since become the annual refrain, are now restated at every turn, not just by Fitch but other rating agencies as well.

    Far from seeking to rationalise the situation, the report should in fact embarrass if not shame the Federal Government. One question most Nigerians seek an answer to is: what has the Jonathan administration done in the whole of 29 months to change the environment of doing business? What about corruption? What concrete foundations are being laid to diversify the economy – to make the economy less dependent on oil which everyone accepts is prone to volatility? Is it simply about mouthing the now familiar reform refrain?

    Of course, we disagree with Minister Okonjo-Iweala’s suggestion that the nation has nothing to worry about. If anything, we worry about the administration’s continuing false choice between so-called macro-economic stability and the welfare of the citizens; its lack of appreciation of the urgency of the situation and palpable disconnect with cold realities on the Main Street. Nigerians of course continue to wonder what it is that makes the Federal Government respond to issues whenever they are raised by foreign agencies, even when the same issues go largely ignored when raised by citizens who in fact bear the brunt of ineffectual governance.

  • Fitch: Nigerian banks’ risk weight rises

    Fitch: Nigerian banks’ risk weight rises

    The higher risk weights introduced by the Central Bank of Nigeria (CBN) are likely to add to pressure on bank capital ratios, Fitch Ratings has disclosed.

    It however said that if successful in reducing sector concentrations, the changes could benefit asset quality and risk management.

    Capital has been tightening at some banks as they expand their loan books following the Asset Management Corporation of Nigeria (AMCON) clean-up of the sector.

    Fitch Core Capital (FCC) ratios at end of September 2012 were 10 per cent to 30 per cent. Speaking with Reuters, Fitch said that some Nigerian banks have lower FCC than is appropriate for their growth in a difficult operating environment (Nigeria is rated ‘BB-’/Stable). This is reflected in their low Viability Ratings (mostly in the ‘b’ range).

    The generous dividend policies demanded by Nigerian investors mean internal capital generation is unlikely to support sustainable growth in the medium-term. It said excessive credit expansion has been temporarily subdued by higher interest rates on government securities following the expiry of the interbank guarantee from the Central Bank of Nigeria (CBN) in 2011.

    “But we still expect loans to grow 18 to 20 per cent this year, close to the rate of inflation-adjusted economic growth as banks focus on increasing lending to government-sponsored projects, especially in the power sector,” it said.

    Fitch said there is little appetite for fresh equity issuances in the market as some banks may want to fund growth with long-term subordinated debt. “This does not count as loss-absorbing capital in our analysis, so further growth together with higher risk weightings would put core capitalisation under pressure. The Nigerian banks continue to report capital ratios based on local GAAP equity rather than the IFRS adopted for financial reporting in 2012,” it said.

    Fitch noted: “This is the same approach as taken by some European regulators. We estimate the regulatory capital ratios for Nigerian banks would be 60 basis points to 120 lower if based on International Financial Reporting Standards (IFRS).