Rating action follows the downgrade of the sovereign rating to B3 from B2, and the placement of the government rating on review for downgrade
October 26, 2022/Moody’s Investors Service
Moody’s Investors Service (“Moody’s”) has today downgraded the long-term deposit ratings to B3 from B2, as well as senior unsecured debt ratings, where applicable, of all the Moody’s rated banks in Nigeria: Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Limited, Union Bank of Nigeria plc, Fidelity Bank plc, FCMB (First City Monument Bank) Limited and Sterling Bank Plc. At the same time, Moody’s has placed the long-term deposit ratings, as well as senior unsecured debt ratings, where applicable, of the nine Nigerian banks on review for further downgrade.
Today’s rating actions follow Moody’s decision on 21 October 2022 to downgrade the long-term issuer rating of the Government of Nigeria to B3 from B2, and to place the rating of the Government of Nigeria on review for downgrade. Please see “Moody’s downgrades Nigeria’s rating to B3 from B2 and places it on review for downgrade”; (https://www.moodys.com/research/–PR_470494).
The review for downgrade on the rating of the Government of Nigeria will focus on understanding the Nigerian authorities’ strategy to address both domestic and external pressures and assessing the associated default risk for the government’s private creditors. On 13 October 2022, the government publicly stated possible options, consisting of extending the maturity of its debts, including through potential bond buybacks or exchanges, which may constitute a distressed exchange under Moody’s default definition.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL470637 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
— DOWNGRADE OF LONG-TERM RATINGS REFLECTS WEAKENING IN GOVERNMENT SUPPORT CAPACITY, AS WELL AS INTERLINKAGES BETWEEN THE CREDITWORTHINESS OF THE SOVEREIGN AND THE BANKS’ BALANCE SHEETS
Moody’s decision to downgrade the long-term ratings of nine Nigerian banks reflects a combination of (i) the weakening in the Nigerian government’s fiscal capacity to support the country’s banks in case of need, as indicated by downgrade of the sovereign rating to B3 from B2; as well as (ii) the interlinkages between the sovereign’s weakened creditworthiness and the banks’ balance sheets, given the banks’ significant holdings of sovereign debt securities.
The downgrade of the rating of the Government of Nigeria reflects the deterioration in Nigeria’s government finances as well as its external position, exerting increasing pressure on the sovereign credit profile notwithstanding the strong increase in international crude oil prices in 2022. Moody’s assessment is that these developments are partly the result of weak governance and likely to last. The steep fall in oil production in 2022 and the extension of the expensive oil subsidy have almost entirely eroded the boost to government revenue and exports that would otherwise have been anticipated from higher oil prices. Policy levers available to manage weaker oil revenue and rising borrowing costs amid monetary tightening in Nigeria and globally are limited. Similarly, on the external front, the capacity of the Central Bank of Nigeria (CBN) to protect foreign exchange reserves from external outflows has its limits.
— PLACEMENT OF LONG-TERM RATINGS ON REVIEW FOR FURTHER DOWNGRADE
Moody’s banks ratings were already placed on review for downgrade on 13 October 2022 to reflect (a) the risk of increasing foreign currency rationing that could compromise the banks’ operational ability to meet their foreign currency obligations, as well as (b) the risk arising from a potential material depreciation in the country’s foreign exchange rate to the banks’ capitalisation and asset quality.
Following the review for downgrade of the sovereign on 21 October 2022, we have placed the banks’ long-term ratings on review for further downgrade in order to incorporate the review for downgrade on the rating of the Government of Nigeria.
The review for downgrade on the rating of the Government of Nigeria reflects the risk that the ongoing fiscal and external deterioration accelerates, weakening further the government’s capacity to service debt and thereby increasing further its risk of default. The review will focus on understanding the Nigerian authorities’ strategy to address both domestic and external pressures and assessing the associated default risk for the government’s private creditors. On 13 October 2022, the government publicly stated possible options, consisting of extending the maturity of its debts, including through potential bond buybacks or exchanges, which may constitute a distressed exchange under Moody’s default definition.
— EXTENTION OF REVIEW
The review on the NG-1 domestic NSR short-term Counterparty Risk Ratings of all nine banks has been extended. The review on the b3 Baseline Credit Assessments, the b3 Adjusted Baseline Credit Assessments, the B2(cr) long-term Counterparty Risk Assessments, the A2.ng domestic NSR long-term Counterparty Risk Ratings and the B2 domestic long-term Counterparty Risk Ratings has been extended for the following five banks: First Bank of Nigeria Limited, Union Bank of Nigeria plc, Fidelity Bank plc, FCMB (First City Monument Bank) Limited and Sterling Bank Plc.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Downwards pressure on the ratings could materialise if (a) the credit profile of the sovereign weakens further, as would be indicated by a downgrade in the sovereign rating; or (b) the review concludes that the constrained availability of foreign currency in the country is likely to impair the banks’ capacity to operationally meet their foreign currency obligations, and/or (c) the review concludes that the banks’ balance sheet lack the resilience necessary to withstand a potential material depreciation in the local currency. The aforementioned challenges could be captured by a lowering of the banking Macro Profile for Nigeria.
Upwards pressure on the ratings is limited given the current review for downgrade. A confirmation of the current ratings at the end of the review period could result from (a) resilience in the credit profile of the Government of Nigeria, as would be indicated by a confirmation of the rating of the Government of Nigeria; or (b) an assessment that the banks have the operational ability to continue to meet their foreign currency obligations in case the foreign currency liquidity shortages were to continue for an extended period of time; or (c) an assessment that the banks’ balance sheets are resilient enough to withstand a potential material depreciation in the local currency in the context of a potential convergence of official and parallel market foreign currency exchange rates.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Moody’s National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody’s global scale credit ratings in that they are not globally comparable with the full universe of Moody’s rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a “.nn” country modifier signifying the relevant country, as in “.za” for South Africa. For further information on Moody’s approach to national scale credit ratings, please refer to Moody’s Credit rating Methodology published in August 2022 entitled “Mapping National Scale Ratings from Global Scale Ratings Methodology”. While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1280297.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL470637 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody’s disclosures on the following items:
• EU Endorsement Status
• UK Endorsement Status
• Rating Solicitation
• Issuer Participation
• Participation: Access to Management
• Participation: Access to Internal Documents
• Lead Analyst
• Releasing Office
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The below contact information is provided for information purposes only. For disclosures on the lead rating analyst and the Moody’s legal entity that issued the rating, please see the issuer/deal page on https://ratings.moodys.com for each of the ratings covered.
The relevant office for each credit rating is identified in “Debt/deal box” on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the website.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
