Fitch Ratings has assigned Ecobank Ghana Limited (EGH) a Long-Term Issuer Default Rating (IDR) of 'B-' with a Negative Outlook and Viability Rating (VR) of 'b-'.

A full list of rating actions is detailed below.

Key Rating Drivers

IDRs AND VR

The IDRs of EGH are driven by its standalone creditworthiness, as expressed by its VR of 'b-'. EGH's Long-Term IDR and VR are constrained by Ghana's Long-Term IDR of 'B-' as the bank does not meet Fitch's criteria to be rated above the sovereign on a standalone basis.

Fitch believes that EGH is unlikely to remain solvent in the event of a sovereign default, due to the concentration of its activities within Ghana, its material reliance on sovereign-derived income and high exposure to the sovereign relative to capital, primarily through government securities (447% of common equity Tier 1 (CET1) capital at end-9M21). The Negative Outlook on EGH's Long-Term IDR mirrors that on Ghana's Long-Term IDR.

EGH is Ghana's second-largest bank, representing 10% of Ghanaian banking-system assets at end-9M21, and its franchise benefits from being a subsidiary of Ecobank Transnational Incorporated (ETI; B-/Stable); a pan-African banking group with operations spanning 33 countries across sub-Saharan Africa (SSA).

EGH's risk profile is fairly strong within the context of the Ghanaian operating environment, with corporate loans representing 67% of net loans at end-2020. Single-borrower credit concentration is moderate, with the bank's 20-largest loans representing 50% of gross loans and 137% of CET1 capital at end-3M21. Sovereign exposure through government securities is high (43% of total assets at end-9M21). Sovereign exposure further stems from lending to the public sector and state-owned enterprises (over 20% of lending).

EGH's impaired loans (Stage 3 loans under IFRS 9) ratio (6.4% at end-9M21) is significantly lower than that of the Ghanaian banking-sector average (15.2% at end-2021). EGH's impaired loans ratio has declined significantly from 16.8% at end-2018, as a result of the government-led resolution of Ghana's energy-sector debt problem and, more recently, recoveries and write-offs. Specific loan loss allowance coverage of impaired loans was 95% at end-9M21.

The share of loans restructured as a result of the pandemic declined to around 2% at end-1H21 from 8% at end-2020. Our asset-quality assessment also considers the bank's small loan book (28% of total assets at end-9M21) and large holdings of Ghanaian government securities.

Profitability is strong, as indicated by operating returns on risk-weighted assets averaging 7.2% over the past four years. This is underpinned by Ghana's high interest-rate environment, low cost of funding and healthy non-interest income. Reliance on interest income on government securities is material (33% of interest income in 2020), reflecting EGH's asset composition.

EGH's CET1 capital ratio (16.1% at end-9M21) is fairly high, reflecting a balance sheet that exhibits low leverage. Pre-impairment operating profit, which equalled 19% of average gross loans in 2020, provides a large buffer to absorb higher loan impairment charges if asset quality deteriorates without putting capital under pressure. Fitch expects EGH's CET1 capital ratio to remain high, supported by strong profitability and the bank's intention to maintain high capital buffers. However, capitalisation would come under pressure from a sovereign default, due to EGH's significant exposure to the sovereign through securities and lending.

Reliance on non-deposit funding is low, with customer deposits representing 94% of total funding at end-9M21. A high percentage of current and savings accounts (89% at end-2020) and a healthy share of granular consumer deposits (42% at end-2020) support funding stability and result in low cost of funding relative to peers'. Depositor concentration is moderate by regional standards, with the 20-largest deposits representing 22% of total customer deposits at end-3M21. EGH's low gross loans/customer deposits ratio (41% at end-9M21) is reflective of a highly liquid balance sheet. Our funding and liquidity assessment also considers the benefits of ordinary liquidity support from ETI.

SHAREHOLDER SUPPORT RATING (SSR)

EGH's SSR of 'ccc+' reflects Fitch's view that, although possible, extraordinary support from ETI cannot be relied on.

Fitch believes ETI has a high propensity to support EGH, reflecting the latter's strategically important role in the group as a key contributor to earnings and strong franchise in Ghana, with it being a fairly large west African economy. Our view also factors in the material reputational damage to ETI that would accompany a EGH default, its 69% ownership of the subsidiary and high management and operational integration.

However, ETI's ability to provide support, if required, is constrained by the group's own creditworthiness and EGH's fairly large size relative to that of the group (11% of consolidated assets at end-9M21).

Rating Sensitivities

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

A sovereign downgrade would result in a downgrade of the Long-Term IDR and VR, given that the bank does not meet Fitch's criteria to be rated above the sovereign

Material deterioration in asset quality that exerts significant downward pressure on capitalisation and leverage may result in a VR downgrade if not compensated by new equity injections

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

An upgrade of the Long-Term IDR and VR would require a sovereign upgrade and an improvement in the operating environment while maintaining reasonable financial metrics

A strengthening in ETI's ability or propensity to provide support could lead to an upgrade of the SSR. Strengthened ability to provide support would most likely be indicated by an upgrade of ETI's Long-Term IDR

VR ADJUSTMENTS

The earnings and profitability score of 'b' has been assigned below the 'bb' category implied score, due to the following adjustment reason: revenue diversification (negative).

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. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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.

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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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