Moody’s Investors Service (Moody’s) has confirmed Access Bank Plc’s long-term local currency deposit rating of B2, long-term foreign currency deposit rating of B3, long-term issuer ratings of B2, local currency senior unsecured rating of B2, local currency national scale deposit ratings of A1.ng/NG-1, foreign currency national scale deposit ratings of A3.ng/NG-2 and national scale senior unsecured rating of A1.ng.
Furthermore, Moody’s has affirmed Access’ short-term bank deposit ratings, issuer ratings and counterparty risk ratings (CRR) at Not-prime and affirmed the short-term counterparty risk assessment (CRA) at Not-prime(cr).
The outlook on the bank’s long-term deposit ratings, long-term issuer ratings and senior unsecured rating was changed to stable from ratings under review.
At the same time, Moody’s downgraded Access’ baseline credit assessment (BCA) to b3 from b2, its long-term CRRs to B2 from B1, long-term CRA to B2(cr) from B1(cr) and national scale CRRs to Aa3.ng from Aa1.ng. Diamond Bank PLC’s (Diamond) BCA was upgraded to b3 from caa3 and all Diamond’s ratings have been aligned with the ratings of Access. The outlook on Diamond’s long-term deposit and issuer ratings was changed to stable from ratings under review. Diamond’s ratings will subsequently be withdrawn.
The actions were driven by the announcement by Access on March 19 that Diamond’s assets, liabilities and undertakings have now been assumed by Access.
The rating actions conclude the review for downgrade on Access’ ratings and review for upgrade on Diamond’s ratings, both initiated on 29 January 2019.
The confirmation of Access’ long term deposit ratings with a stable outlook reflects Moody’s view that the deterioration in Access’ standalone credit profile, as a result of the merger, is balanced against our assumption of a high likelihood of Access being supported by the government of Nigeria (B2, stable), if needed.
According to the rating agency, the downgrade of Access’ BCA to b3 from b2 reflects Moody’s view that there will be a weakening of the bank’s credit profile following the merger with Diamond, despite the immediate improvement to Access’ funding structure and long-term profitability. “Following the merger, Access’ capital and asset risk metrics will deteriorate given Diamond’s weaker credit profile (though much smaller than Access, Diamond had a BCA of caa3 before the merger was completed).
Following the BCA downgrade to b3, we now incorporate 1 notch of rating uplift on Access’ BCA to align its local currency deposit ratings of B2 with that of Nigeria’s issuer rating.”, Moody’s said.
Moody’s upgrade of Diamond’s ratings however reflects the fact that the rated deposits and liabilities of Diamond are now assumed by Access, a stronger entity and as a result, Diamond’s ratings have been aligned with Access’ ratings.
Moody’s said, confirmation and stable outlook is driven by standalone and support considerations.
The primary driver of the confirmation of Access’ long-term deposit ratings with a stable outlook is Moody’s view that the deterioration in Access’ standalone credit profile, as a result of the merger, is balanced against our assumption of a high likelihood of Access being supported by the government of Nigeria (B2, stable) if needed.
“Access’ local currency deposit rating and outlook is in line with the issuer rating and stable outlook of the support provider, the government of Nigeria”, Moody’s said.
Following the merger, Access’ market share increased to 14.8 percent in deposits from 10.3 percent (as of September 2018) and, combined with a customer base of 29 million, is now the largest bank in Nigeria. Given the systemic importance of the bank to the economy and Nigeria’s payments system, Moody’s expects that external support from the authorities will be forthcoming if needed.
Despite the immediate improvement to Access’ funding structure and the operational synergies that will support long-term profitability, the primary driver of the downgrade on Access’ BCA is Moody’s view that there will be a deterioration of the bank’s capital and asset risk metrics, following the merger with Diamond. Furthermore, the rating action also takes into account implementation and execution risks in managing asset risk and growing profitability of the merged entity.
In the near-term, Access’ tangible common equity (TCE) to risk-weighted assets ratio and nonperforming loans (NPL) ratio are expected to deteriorate from 14 percent and 5 percent, respectively as of September-end 2018, following the absorption of Diamond’s undercapitalized balance sheet and weak loan portfolio (Diamond NPLs were 42 percent as of September 2018). Moody’s, however, expects a gradual recovery in Access’ standalone credit profile over the next 2 years, including the normalization of the bank’s non performing loan metrics.
Access’ funding profile expected to benefit from Diamond’s large retail deposit base. As of September 2018, about 75 percent of Diamond’s deposits were inexpensive retail deposits while Access has a higher reliance on more confidence-sensitive corporate deposits. The rating agency expects the cost of deposits for Access to lower by 100-150 basis points in the next 18 months, which will support the bank’s net interest margins. Additionally, in the long-term, the acquisition will enhance Access’ profitability through a broadened product offering and efficiency savings relating to branch network, workforce, procurement and support and IT services.