July 6, 2021/S & P Ratings

By S & P Global Ratings

• We view Standard Chartered Bank Nigeria Ltd. (StanChart Nigeria) as a strategically important subsidiary of Standard Chartered PLC.
• Despite good risk-adjusted returns, we consider its franchise less diversified compared to top-tier banks in Nigeria.
• We have assigned our ‘B-/B’ issuer credit ratings to StanChart Nigeria, capped by the foreign currency sovereign ratings on Nigeria owing to the effects–direct and indirect–sovereign stress would have on the bank’s operations and creditworthiness.
• The stable outlook mirrors the outlook on Nigeria.

S&P Global Ratings assigned its ‘B-/B’ long and short-term issuer credit ratings to Standard Chartered Bank Nigeria Ltd. (StanChart Nigeria). The outlook is stable.

We view StanChart Nigeria as a strategically important subsidiary of Standard Chartered PLC (the group). StanChart Nigeria is the group’s largest subsidiary in Africa and plays an important role in supporting the group’s strategy on the continent. The bank has operated profitably in Nigeria, providing revolving trade financing facilities and working capital to corporates in the country. It recorded an average return on equity (ROE) of 22% in the past four years. More recently, the bank has started diversifying into the retail space and is leveraging the group’s capabilities by gradually deploying products to acquire new clients. StanChart Nigeria’s retail strategy is focused on the high end of the Nigerian market, which is highly competitive with many banks offering a full suite of wealth management solutions. StanChart Nigeria’s growth targets have been defined by the group’s risk appetite over its past two decades of operations. This has constrained the bank’s competitive positioning against top-tier banks in Nigeria. In addition, the bank’s long-term growth prospects are subject to short and volatile economic cycles in Nigeria.

We expect StanChart Nigeria’s capitalization to remain moderate. We forecast the bank’s risk-adjusted capital (RAC) ratio before diversification will drop below 7% in the next 12-18 months, which corresponds to a moderate assessment of capital and earnings, according to our criteria. Our forecasts assume a lending growth rate averaging 15% and a pay-out ratio of 50% through 2022. Profitability was hit in 2020 because of pressure on net interest margin on the back of lower interest rates and the Central Bank of Nigeria’s (CBN) cash reserves requirements (CRR) debits, resulting in operating revenue falling 28%. At the same time, operating costs increased 21% on the back of higher regulatory charges (Asset Management Corporation of Nigeria levies collected as a result of the 2010 banking sector clean ups). In 2021, we expect profitability to decline on the back of a normalizing tax rate and higher cost of risk, as regulatory forbearance measures end. We also expect operating costs to increase slightly as the bank invests to improve its digitization. Overall, we forecast the bank’s ROE will average 10% over the next 12-18 months. However, we assume a mild net interest margin improvement in 2021 as the CBN returns CRR debits that the bank can deploy in higher-yielding assets. We forecast a recovery in profitability beyond 2022 with ROE improving to 15% as net interest margins strengthen to 5.5% in 2023 from 3.6% in 2021 and cost of risk normalizes to 0.5% over the same period.

We expect StanChart Nigeria’s asset-quality indicators to remain resilient. The bank’s asset-quality metrics showed improvement in 2020, supported by recovery of a substantial portion of nonperforming loans (NPLs). Following the end of regulatory forbearance measures in March 2021, we expect the NPL ratio will peak at 1.7% in the next 12 months with a gradual improvement thereafter. We also expect the cost of risk to increase to 0.9% through 2022. This compares well to the system average, for which we assume the NPL ratio will rise close to 10% and average cost of risk of 2.5% in 2021. We consider StanChart Nigeria to have conservative lending and underwriting standards, which are underpinned by the parent’s oversight. However, concentration risk is high with the top-20 loans accounting for 65% of total loans at year-end 2020. In addition, foreign currency lending–which contributed to 65% of total loans at year-end 2020–is a source of risk. The banking sector continues to face foreign-exchange shortages despite the recent move by the CBN to adopt the Nigerian autonomous foreign exchange rate (NAFEX) window.

StanChart Nigeria’s funding profile compares adequately to that of most peers.Core customer deposits account for about 70% of total deposits. Similarly, to other Nigerian peers, the bank is exposed to contractual maturity mismatches with deposits dominated by short-term instruments. However, these funds have been stable over time, including in times of stress. It also relies on foreign-exchange deposits that account for 40% of total deposits. We consider Nigerian naira liquidity adequate, reflected by the 410% broad liquid assets to short-term wholesale funding (BLAST) ratio and net stable funding ratio (NSFR) of 250% at year-end 2020. In the event of a foreign-exchange shortage in the market, we expect the bank can rely on its parent to meet its funding needs.

The stable outlook on StanChart Nigeria mirrors our outlook on the sovereign.

We would lower the rating on the bank if we lowered the rating on Nigeria. This could happen if we observed increasing risks to the government’s capacity to repay commercial obligations, either due to declining external liquidity or a continued reduction in fiscal flexibility.

We will raise the rating on StanChart Nigeria if we take a similar action on the sovereign, all else being equal, including our expectation of group support from parent Standard Chartered PLC over the next 12 months.