February 8, 2022/Fitch Ratings

Fitch Ratings has assigned Bank of Industry Limited’s (BOI) senior note participation notes an expected long-term rating of ‘B(EXP)’ with a Recovery Rating of ‘RR4’. The notes will be issued by BOI Finance B.V. (BOI Finance), a Netherlands-based special purpose vehicle established solely to provide funding for BOI.

Fitch has affirmed Nigeria-based BOI’s Long-Term Issuer Default Rating (IDR) at ‘B’ with a Stable Outlook.

The notes’ expected rating is in line with BOI’s and Nigeria’s Long-Term IDRs of ‘B’ due to the transaction’s features.

The assignment of a final rating is contingent on a review of the final terms and conditions conforming to information already received by Fitch.

Fitch is withdrawing BOI’s Support Rating of ‘4’ and Support Rating Floor of ‘B’ as they are no longer relevant to the agency’s coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned BOI a Government Support Rating (GSR) of ‘b’.

Key Rating Drivers

Senior Debt

Under the transaction’s structure, BOI Finance will use the proceeds of the notes to purchase a senior note issued by BOI. BOI’s financial obligations under the senior note will be irrevocably and unconditionally guaranteed by the Federal Government of Nigeria (FGN).

The FGN guarantee does not apply to the notes issued to investors by BOI Finance but to BOI’s obligations to BOI Finance under the senior note. However, given the guarantee and structural features of the transaction, in Fitch’s view if BOI fails to meet its obligations under the senior note, the FGN’s guarantee would serve to ensure the full repayment of principal and interest on the notes issued by BOI Finance. Any further series could be rated differently, in the absence of a similar guarantee.

IDRs and GSR

BOI’s ‘b’ GSR and the affirmation of its ‘B’ Long- and Short-Term IDRs reflects Fitch’s view of potential support the bank could receive from the Nigerian authorities in case of need.

BOI’s Long-Term IDR is equalised with Nigeria’s sovereign rating (B/Stable). This reflects our view that the Nigerian authorities have a high propensity to support BOI, if required, given BOI’s 99.9% state ownership, long-lasting policy role and strategic importance to the country’s economic development, and the entirety of its wholesale funding being either provided or guaranteed by the Nigerian state. However, Fitch views the ability of the authorities to support BOI as limited, as indicated by the level of Nigeria’s sovereign rating. The Stable Outlook on BOI’s Long-Term IDR mirrors that on the sovereign.

BOI is Nigeria’s primary development bank, and its important role would be difficult to transfer to another state-owned institution, in our view. The bank supports government policies, including financing the country’s emerging industrial sector.

BOI has diversified its funding since the onset of the pandemic. In March and December 2020, the bank secured two large syndicated loan facilities of EUR1 billion and USD1 billion, respectively, from syndicates of commercial banks and multilateral development banks, which are fully guaranteed by the Central Bank of Nigeria (CBN). The proceeds of the borrowings are swapped with the CBN, boosting its foreign-exchange reserves and providing BOI with Nigerian naira to support its developmental activities. Channelling substantial funding to borrowers and priority sectors will take time. At end-1H21, 48% of BOI’s total assets were kept in liquid government bonds and cash, compared with 20% at end-2019.

BOI maintains solid capitalisation and leverage metrics (end-1H21: equity-to-asset ratio of 19.4%), which is prudent for the bank’s exposure to the volatile operating environment. Profitability is not a key objective. However, BOI continues to generate reasonable returns on equity (1H21: 18% annualised) driven by healthy net interest margins and moderate loan impairment charges so far.

National Ratings

BOI’s Long-Term National Rating of ‘AAA(nga)’ reflects the strong linkage between the bank and the sovereign, as evident in the significant size of state guarantees provided for BOI’s recent external funding. At present, all of BOI’s funding is either guaranteed or provided by the CBN or the FGN. In our view, this suggests that the sovereign’s propensity to provide extraordinary support to BOI in local currency is high.

Viability Rating

As is usual for development banks, Fitch does not assign a Viability Rating to BOI. This is because its business model depends on government support, and in our view, could not be carried out on a commercial basis.

Rating Sensitivities

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

IDRs, GSR, NATIONAL RATINGS AND SENIOR DEBT

The most immediate downside rating sensitivity for BOI’s IDRs and GSR would be a downgrade of Nigeria’s sovereign ratings.

BOI’s ratings are also sensitive to a reduced propensity of the authorities to support the bank. This could be indicated by a change in BOI’s policy role, such as a shift into commercial activities, or a material reduction in government ownership. However, this is unlikely.

BOI’s National Ratings are sensitive to a negative change in Fitch’s opinion of the bank’s creditworthiness relative to that of domestic peers. This could arise from a change in our view of BOI’s role and importance to the sovereign, including, but not limited to, materially lower funding guarantees or weaker support for BOI from the authorities.

The notes’ rating would be downgraded if both Nigeria’s and BOI’s Long-Term IDRs were downgraded.

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

IDRs, GSR AND SENIOR DEBT

An upgrade of BOI’s IDRs and upward revision of its GSR would require an upgrade of Nigeria’s sovereign ratings.

The notes’ rating would be upgraded if either BOI’s or Nigeria’s Long-Term IDR was upgraded.

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.

References For Substantially Material Source Cited As Key Driver Of Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings With Credit Linkage To Other Ratings

The ratings of BOI and the notes are equalised with Nigeria’s sovereign.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.