Moody's Investors Service has today assigned first-time ratings to Access Bank Plc (Access): Ba3/Not Prime Local and Foreign Currency Issuer Ratings; Ba3/Not Prime Local Currency Deposit Ratings and a B1/Not Prime Foreign Currency Deposit Rating, and a b2 Baseline Credit Assessment (BCA). The outlook on all the ratings is stable. Moody's also assigned a Counterparty Risk Assessment (CRA) of Ba3(cr)/Not Prime(cr).
"Access Bank's b2 standalone profile reflects (1) solid asset quality metrics, underpinned by tangible improvements in loan underwriting standards and risk management in recent years; (2) robust capital and liquidity buffers, supported by sustainable internal capital generation; and (3) a stable liability structure predominantly funded with deposits. These strengths are balanced against (1) Nigeria's challenging operating environment, which takes into account the strong growth potential of the system and institutional and structural weaknesses; (2) concentration risks on the bank's books, including to the oil and gas industry, and (3) the high loan growth recorded by the bank in recent years. While these factors pose the risk of asset quality volatility through a full economic cycle, we believe Access is very well positioned to weather such challenges and, therefore, we expect its standalone credit profile to remain resilient.
"The Local Currency Deposit Ratings also incorporate a two-notch uplift from the Access' b2 baseline credit assessment (BCA), based on our assessment of a very high likelihood of government support in the event of need. This view reflects the bank's Systematically Important Bank (SIB) status in Nigeria and the government's willingness to support troubled banks, as indicated in the past. Our support assumptions bring the local currency deposit ratings, the issuer ratings, and the CRA of Access in line with the Nigerian sovereign rating level of Ba3.Our methodology comprises an assessment of a bank's operating environment which, for Access, is primarily based on our assessment of Nigeria's macro profile, where the bank conducts most of its business, with 87 per cent of its assets being extended to Nigeria-based borrowers.
"While Nigeria's economy features institutional and structural weaknesses that can pose challenges to the banks, it has also shown strong resilience to shocks and it presents tremendous growth opportunities which will allow the banks to expand steadily.
"We assign a 'Very Weak +' macro profile score to Nigeria, reflecting the country's fiscal dependence on the oil and gas sector, its weak institutions and relatively high level of corruption (based on indices from the World Bank) as well as the risks of political instability posed by the presence of Islamist militant group Boko Haram in the northeast.
"We acknowledge the Nigerian banking sector features significant growth opportunities given low banking penetration, especially in retail and SME space. However, high loan growth, a rising proportion of which is foreign currency, and high loan book concentrations tend to keep credit risks high.
"Importantly, the recent transition in government following orderly elections highlights the positive momentum that is setting in from a governance and economic standpoint. If or when they materialise, reforms being contemplated by the new government to improve public finance, anti-corruption initiatives and a recovery in oil prices would have positive effects on the operating environment and, ultimately on the macro score and the banks' ratings.
"A key feature of Access' standalone profile is the bank's improved asset quality thanks to a mix of asset sales post crisis (2008-2010), and improved underwriting standards and risk management since. While the bank reported NPL ratio was 2.2 per cent at year-end 2014, we adjust this metric to arrive at a ratio that we view as more comparable with peers internationally, whereby we add individually impaired loans to the loans that are overdue by more than 90 days but not impaired. As per our adjusted NPL ratio, asset quality improved considerably in the last two years, with NPLs declining to 3.5 per cent in 2014 from 5.1 per cent in 2013. In fact, Access' asset quality is among the most improved over the last five years when compared to domestic peers. Furthermore, NPLs are covered by provisions (including regulatory reserves) that amount to 97 per cent of doubtful credit (when measured against our adjusted NPL ratio), or slightly above 150 per cent of reported NPLs.
"Initiatives taken by the bank to improve underwriting standards includethe development of a robust internal rating framework to classify corporate borrowers, monitor their creditworthiness and take preventive measures to avoid delays in payments and/or reduce exposure well before limits are reached. Incidentally, the bank's top 20 borrowers feature strong internal ratings, with only one rated as 'non-investment grade'.
"These credit strengths are balanced by the bank's rapid loan growth in recent years, growing at 38.5 per cent and 33 per cent in 2014 and 2013 respectively, posing potential challenges as the loan portfolio matures. The foreign currency denominated portfolio was 45 per cent of the total loans and advances as at end of 2014, leaving the bank exposed to the exchange rate volatility of the Naira, although we note that management has been proactive in hedging these currency exposures. Nevertheless, like most banks in Nigeria, Access' exposure to the oil and gas industry, which stands at around 25 per cent of total loans, remains a potential source of negative credit quality pressure, as oil prices remain depressed and the sector is over-weighted in the loan book compared with the declining oil and gas sector contribution to Nigeria's GDP output.
"In addition, Access' loan portfolio exhibits single name concentration risk. The funded exposure of the bank's top 10 borrowers make up 125 per cent of the bank's tangible equity, exposing the bank's capital buffer to potential sudden erosions in case one or a few of the top obligors default. However, the bank's internal ratings imply a robust asset quality of the bank's top 10 borrowers with 9 out of the 10 (91 per cent by funded exposure) internally rated 'investment grade'.
"Access is well capitalized and this credit strength has been further enhanced by a recent rights issue. The bank reported a Tier 1 and total capital adequacy ratios of 14 per cent and 18 per cent respectively as at the end of 2014. Furthermore, its ratio of total shareholders equity-to-total assets is also robust at 13.2 per cent, highlighting a relatively conservative risk-weighting of assets (RWA) and modest leverage.
"With a rights issue of NGN52 billion executed in March 2015, Access' management expects the Tier 1 ratio to increase to 18 per cent, while total capital should reach about 21 per cent once the proceeds are included in its reported capital ratios in the coming financial results.
"Going forward, we expect the bank's capitalisation to remain strong, primarily because of Access' robust profitability metrics, which provide internal capital generation capacity that can support the anticipated growth of the bank, particularly if the recent reduction in its dividend pay-out ratio (to 13.5 per cent of net earnings) is maintained. Net interest margins and net income-to-tangible assets ratios stood at 5.5 per cent and 2.3 per cent respectively as at end of December 2014.
"That said, we view Access' reported capitalization as being moderated by the bank's exposure to the government of Nigeria - primarily through its holdings of government securities -- which is risk-weighted at zero under the domestic regulatory framework. In order to more fully capture the risks associated to the government bonds, our practice globally is to assign a risk-weight to sovereign debt holdings, as per the Basel Committee. For a sovereign rated Ba3, like Nigeria, we assign a 100 per cent risk-weighting, which results in an adjusted Tier 1 ratio of 12 per cent and a total capital ratio of 15.4 per cent for the year ending in December 2014, which remain above domestic and global peers.
"The BCA we assign to Access also reflects its robust liability profile. The bank is predominantly deposit funded, with deposits composing 75 per cent of the bank's funding sources compared with an average of around 65 per cent for the system. Although the share of retail deposits is small, the corporate and SME depositors that make up the bulk of the bank's deposits are broadly diversified and granular, posing little concentration risks. Furthermore, the bank's dependence on market funds -- while being material 12.7 per cent of tangible assets -- remains modest relative to global peers and refinancing risks are further mitigated by a recent trend towards the lengthening of tenors.
"The bank's liquid assets to total assets ratio provides a thick cushion, at 37 per cent as of December 2014, which is also over and above the 30 per cent required by regulators. Going forward, we expect the bank's funding and liquidity profile to remain roughly at the same level.
"The Ba3 Local Currency Deposit Ratings incorporate two notches of rating uplift from its b2 BCA, based on Moody's assessment of a 'Very High' probability of support in case of financial stress. This support assumption is supported by (1) the SIB status of the bank; and (2) Nigeria's strong record of supporting troubled banks in the past.
"Access' SIB status reflects its size as the 5th largest bank in the system with a market share of 7.8 per cent of both total system assets and deposits. The bank's importance in the country's payment system and its interconnectedness are fairly high, as is its role in the interbank market.
"The strong willingness to support the banks by the Nigerian government(Ba3, stable outlook) was demonstrated in the last crisis, when banks were rescued through recapitalisations and balance sheet clean ups, with outright purchases of NPLs by the Asset Management Corporation of Nigeria (AMCON). Furthermore, Nigerian regulatory authorities do not currently have bail-in powers that would allow them to impose losses on creditors outside of a liquidation process.
"An upgrade in the bank's rating could be triggered by improvements in the operating environment and overall macro profile, or following developments that would alter our expectation that the bank will face asset quality volatility, including for instance a longer track record that would more clearly highlight the robustness of the bank's risk management framework and controls. Furthermore, an upgrade of Nigeria's sovereign rating could also put upward pressure on the bank's ratings.
"Conversely, a downgrade on Access' rating could be driven by a deterioration in Nigeria's macro profile, which could in turn pressure capital, liquidity and profitability metrics. A downgrade on Moody's Nigeria sovereign rating would also exert pressure on the rating because of the high exposure to government securities. Moody's changes to support assumptions could also trigger a downgrade."
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