October 6, 2020/Fitch Ratings

Fitch Ratings has affirmed Access Bank Plc’s ‘ Long-Term Issuer Default Rating (IDR) at ‘B’ and removed it from Rating Watch Negative (RWN). The Outlook is Negative.

The removal of Access‘s Long-Term IDRs, Viability Rating (VR) and National Ratings from RWN reflects Fitch’s view of receding near-term risks to the bank’s credit fundamentals from the economic fallout arising from the oil price crash and coronavirus pandemic.

In our opinion, the impact of the economic downturn on Access‘s credit profile is largely contained at its current rating and it will take several quarters before the full extent of the crisis on corporates and households is seen in its financial metrics. Since the previous rating action in March, regulatory forbearance on asset classification and banks’ own debt relief measures have significantly eased sector asset quality pressures. Nevertheless, debt relief measures are temporary and with the eventual easing of fiscal and monetary support from the Central Bank of Nigeria (CBN), there remains a material risk that bank asset quality could deteriorate faster, unless economic recovery gathers pace.  

The Negative Outlook on Access’s Long-Term IDR reflects our view of sustained downside risks to the operating environment, the heightened level of risk in doing banking business and resulting risks to its capital as well as ongoing pressures on the bank’s asset quality and earnings over the next 12-18 months.

Key Rating Drivers

IDRS, VR, and Senior Debt Ratings

Access’s IDRs and senior debt ratings are driven by its intrinsic creditworthiness, as defined by its ‘b’ VR. Access’s VR is constrained by the volatile operating environment in Nigeria, which has a high influence on the rating.

Access’s impaired (IFRS 9 Stage 3) loans ratio improved to 4.9% at end-1H20 (end-2019: 5.9%) due to improvements in risk management practices, recoveries and write-offs. The bank’s reserve coverage of 103% was among the highest in the sector at end-1H20.The quality and performance of the loan book inherited from the Diamond Bank acquisition remains a relative constraint on our overall assessment of asset quality.

Over the next few quarters, we expect a moderate increase in Access’s impaired (Stage 3) loan ratio with its customers exposed to the recession, currency devaluation, US dollar shortages and distress in certain key industry segments, especially the oil sector (at end-1H20: Access’s gross oil sector exposure formed 30% of gross loans and net exposure of 156% of Fitch Core Capital). At end-1H20, the bank’s gross loans that were subject to debt relief was broadly in line with the peer group. The bank’s stock of Stage 2 loans declined to 22% of gross loans at end-1H20 from 31% at end-2019. The majority of these loans came from Diamond and while they may not migrate to Stage 3 owing to prudent risk management, a longer track record of performance, especially in the current credit cycle, would be an important rating driver.

Access will remain profitable in 2020 with 1H20 operating profit/risk-weighted assets at 3.8%, but performance metrics continue to be weaker than direct peers. Under current conditions, like its peers, Access will face the prospect of a prolonged period of lower earnings and rising net impairment charges. More positively, the bank has seen a significant decline in its cost of funding owing to an improving deposit mix post-acquisition.

The bank’s Fitch Core Capital (FCC) ratio of 14.3% at end-1H20 (end-2019: 14.9%) is adequate for its risk profile but weaker than direct peers partly due to the acquisition. We expect the bank’s Tier 1 ratio (end-1H20: 15.9%) and capital adequacy ratio (end-1H20: 20.4%) to remain broadly stable over the next 12-18 months. Capital plans include higher retained earnings, a reduction in risk-weighted assets (including asset sales) and Tier 2 debt issuance. Access’s dividend pay-out ratio (23.7% in 2019) is among the lowest in the sector.

Access has a strong funding profile with low-cost current and savings accounts reaching 66% of total deposits at end-1H20 thanks to the acquisition. The bank will also benefit from the CBN lowering the floor on saving rates. Customer deposits grew by 10% in 1H20 partly owing to the expansion of the bank’s digital channels and its financial inclusion initiatives. The bank has good overall balance sheet liquidity but takes foreign currency liquidity risk (and counterparty risk) through substantial currency swaps with the CBN.

Support Rating and Support Rating Floor

Sovereign support to banks cannot be relied on given Nigeria’s weak ability to provide support, particularly in foreign currency. The Support Rating Floor of all Nigerian banks is ‘No Floor’ and all Support Ratings are ‘5’. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable

National Ratings

Access’s National Ratings reflect its creditworthiness relative to other issuers in Nigeria and are driven by its standalone strength. They are lower than the highest rated Nigerian peers due to Access’ comparatively weaker profitability and capitalisation metrics. Access’s National Short-Term Rating of ‘F1(nga)’ is the lower of the two possible options for the bank’s ‘A+(nga)’ National Long-Term Rating under Fitch’s criteria, reflecting potential risks to funding and liquidity from market instability.

Access’s naira-denominated subordinated debt rating is ‘A-(nga)’, in line with the two-notch base case notching in our criteria.

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

• Upside to the ratings is unlikely at present but could come from a material improvement in operating conditions and a sovereign upgrade. The Outlook would be revised to Stable if Access improves its profitability and capital buffers in line with direct peers while maintaining good asset quality.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

• Our assessment of the operating environment is revised downward. For example, if the post-lockdown disruption persists and oil price weakness and global economic turmoil extend into next year, giving rise to a more severe economic and financial market fallout than currently expected.
• Access’s Fitch Core Capital ratio remains below 15% for a sustained period
• A material weakening in Access’s loan book, which may result from high exposure to the oil and gas sector or migration of Stage 2 loans to Stage 3, to the extent that the bank’s impaired loan ratio increases above 10%.
• A severe tightening in the bank’s foreign currency liquidity

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.