15 Oct 2014/Fitch Ratings
(The Agency released this statement Wednesday)
Fitch Ratings-London-15 October 2014: Fitch Ratings has upgraded Togo-based Ecobank Transnational Incorporated’s (ETI, the holding company of the pan-African Ecobank group) Long-term Issuer Default Rating (IDR) to ‘B’ from ‘B-‘ and Viability Rating (VR) to ‘b’ from ‘b-‘. The Outlook is Stable. A full list of rating actions is provided at the end of this commentary.
KEY RATING DRIVERS: IDRs and VR
ETI’s Long-term IDR is based on its intrinsic creditworthiness as reflected in its VR. The upgrade of ETI’s VR and Long-term IDR reflects its stronger capitalisation following Nedbank’s (BBB/Negative’) acquisition of a 20% stake in the group in October 2014.
Upon acquisition of the stake, Nedbank converted USD285m outstanding subordinated loans, which were accounted for as regulatory tier 2 capital, into equity and injected an additional USD208m. Due to the debt conversion and capital increase, ETI’s Fitch core capital ratio improved to around 16% (from 10.2% at end-FY13) and double leverage declined materially to around 104% (from 143% at end-FY13). Regulatory tier 1 and total capital ratios have also improved to around 16.4% (FYE13: 13%) and 17.3% (FYE13: 16.3%) respectively. The upgrade reflects Fitch’s assumption that ETI will maintain high capital ratios and low double leverage. Furthermore, in Fitch’s opinion, with Nedbank and Qatar National Bank (QNB; A+/Stable) becoming strategic shareholders, ETI’s access to capital for its ordinary operations has significantly improved. QNB’s stake stands at 17%.
As a leading pan-African banking group, ETI has fully fledged banking subsidiaries in 36 countries across the region. These countries are either not rated or have low ratings (between ‘B’ and ‘BB-‘). Fitch considers ETI’s operating environment volatile and challenging, which has high influence on the VR. Fitch also views financial market developments and regulatory frameworks as weak in most of these jurisdictions. Around 40% of ETI’s assets are in Nigeria (BB-/Stable) where its 100%-owned main operating subsidiary, Ecobank Nigeria, is based. Therefore, the group’s prospects are, to a large extent, linked to those of its Nigerian operations, which are improving following several years of under-performance.
Fitch expects internal capital generation to improve, given ETI’s strong profitability trends. ETI has to date proven its ability to deliver consistently strong and diverse earnings from its subsidiaries. Although past performance has been hampered by high loan impairment charges, mainly in Nigeria, these are forecast to decline with improving asset quality. Following large write-offs its NPL ratio fell to a low 4.2% at end-1H14, which although positive, can be variable given its exposure to emerging industries and low-rated sovereigns.
Fitch believes ETI will benefit from substantial synergies with Nedbank and QNB. These could be in cross-border banking as well the sharing of technical skills, strong governance practices and risk management expertise. We believe ETI has made good progress in addressing its widely publicised corporate governance problems although the benefits of the stronger corporate governance set-up have yet to extend to an operational level. Fitch believes operational risk from running such a wide network is high.
RATING SENSITIVITIES: IDRs and VR
A material worsening in the operating environment, increasing double leverage and weaker capitalisation could lead to a downgrade in ETI’s VR and consequently its IDRs. Furthermore, weaker funding and liquidity and asset quality deterioration could also trigger a downgrade. Upside potential to the VR is limited at present given the volatile and challenging environment where ETI operates.
KEY RATING DRIVERS: Support Rating and Support Rating Floor
ETI’s Support Rating and Support Rating Floor, at 5 and ‘No Floor’ respectively, reflect Fitch’s opinion that there is no reasonable assumption that sovereign support would be forthcoming for the group. Although Ecobank Nigeria, the group’s largest subsidiary, could receive support from Nigeria, if required, sovereign support from Nigeria is unlikely to extend to ETI or other parts of the group.
While Nedbank and QNB are long-term and strategic investors in ETI, their current stakes in the group and the limited integration of operations currently mean that institutional support cannot be relied upon. As a result institutional support is not factored in the ratings.
RATING SENSITIVITIES: Support Rating and Support Rating Floor
The Support Rating and Support Rating Floor are unlikely to be upgraded unless there is a substantial change in assumptions around the increased propensity or ability of Nigeria to provide support to the entire group beyond the sole Nigerian operations.
ETI’s Ratings
Long-term foreign currency IDR: upgraded to ‘B’ from ‘B-‘; Stable Outlook
Short-term foreign currency IDR: affirmed at ‘B’
Viability Rating: upgraded to ‘b’ from ‘b-‘
Support Rating: affirmed at ‘5’
Support Rating Floor: affirmed at ‘No Floor’
