Moody’s places Nigeria’s biggest banks on downgrade review
Moody’s Investors Service has placed on review for downgrade the long-term deposit ratings, as well as the long-term issuer and senior unsecured debt ratings of the nine largest banks in Nigeria under it coverage.
In a statement, Moody’s said the financial institution includes Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Limited, Union Bank of Nigeria, Fidelity Bank, First City Monument Bank Limited and Sterling Bank Plc.
It said the decision to place the long-term ratings of nine Nigerian banks on review for downgrade reflects the risk of increasing foreign currency rationing that could compromise the banks’ operational ability to meet their foreign currency obligations, as well as the risk arising from a potential material depreciation in the country’s foreign exchange rate to the banks’ capitalisation and asset quality.
According to Moody’s, constraints on domestic oil production, capital outflows, and the increased cost of the country’s imported refined petroleum products, coupled with US dollar strengthening, have together weighed on the availability of foreign currency liquidity in the country despite higher oil prices and material discrepancies between official and parallel market exchange rates persist in the country.
It noted that Nigeria’s foreign exchange reserves have declined to $38 billion as of September 2022 from $40 billion as of January 2022 despite higher oil prices.
“…we understand that the central bank, which is the main provider of foreign exchange in the country, has consequently scaled down and become increasingly selective with its foreign currency allocations”.
The review for downgrade on the long-term ratings of Nigerian banks also captures the risk that a potential material depreciation in the country’s foreign exchange rate could pose to the banks’ capitalisation and asset quality, the global rating firm said.
On average, around 40% of loans extended by Moody’s-rated Nigerian banks as of December 2021 were denominated in foreign currencies, predominantly dollars, according to the report released.
Moody’s said some of these borrowers are vulnerable to a further depreciation of the naira because they do not earn foreign-currency income, and a weaker naira would harm their repayment capacity. The banks’ relatively high level of dollarisation also constrains the central bank’s capacity to act as a lender of last resort in case of need.
The statement added that Moody’s rating review will focus on assessing the banks’ operational ability to meet their foreign currency obligations.
It noted further that the rating review will take into account the expected evolution in foreign exchange reserves, as well as the various tools at the banks’ disposal to conduct foreign currency payments amid reduced availability of US dollars.
Moody’s rating review will also assess the resilience of the banks’ foreign currency liquidity positions and risk management frameworks amid ongoing foreign currency rationing in Nigeria and tightening funding conditions globally.
It said the review will evaluate the resilience of the banks’ balance sheets to a potential material depreciation in the country’s foreign exchange rate.
In particular, the rating agency review will assess the extent to which the banks’ capitalisation buffers and foreign currency positions mitigate the risk of a potential material weakening in the local currency.
