Fitch Ratings has affirmed Sterling Bank Plc’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook.
In the same vein, the National Long-Term Rating has been upgraded to ‘BBB+(nga)’ from ‘BBB(nga)’, thus reflecting the bank’s increased creditworthiness relative to that of other issuers in Nigeria.
Key Rating Drivers
Issuer Default Ratings and Viability Rating
According to Fitch, “The IDRs of Sterling are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR) of ‘b-‘.
“The VR reflects the concentration of the bank’s activities within Nigeria’s challenging operating environment, a fairly small franchise, high credit concentrations, and foreign currency (FC) funding and liquidity weaknesses resulting from high depositor concentration. This is balanced against adequate asset quality and capitalisation for the bank’s risk profile.”
The report further stated that “The Stable Outlook reflects Fitch’s view that risks to Sterling’s credit profile are captured by the current rating, with sufficient headroom under our base case to absorb the fallout from operating-environment pressures.”
It pointed out that operating conditions in Nigeria are gradually stabilising.
“Fitch forecasts 1.9 per cent GDP growth in 2021, following a 1.8 per cent contraction in 2020. Our baseline scenario is that business volumes and earnings should continue to rebound in 2021, while the rally in oil prices is also a positive factor. Nevertheless, downside risks linger, given inherently volatile market conditions, with banks still exposed to FC shortages, potential further currency devaluation, rising inflation and regulatory intervention by the Central Bank of Nigeria,” it stated.
Fitch was also of the position that “Sterling has a fairly small franchise, representing 3 per cent of domestic banking-system assets at end-2020.
“Single-borrower concentration is high, with the 20-largest customer loans representing 53 per cent of gross loans or 286 per cent of Fitch Core Capital (FCC) at end-1H21.”
Its oil and gas exposure has reduced in recent years but remains material, representing 26 per cent of gross loans or 139 per cent of FCC at end-1H21, and is concentrated in the upstream and services segments, posing a significant risk to asset quality in the event of a prolonged period of low oil prices and production cuts.”
The report pointed out that the bank’s impaired loans (Stage 3 loans under IFRS 9) ratio increased to 2.9 per cent at end-3Q20 from 2.2 per cent at end-2019, as a result of the pandemic, but declined to 1.8 per cent by end-1H21 on write-offs and robust loan growth.
The report also noted that Sterling with specific loan loss allowance (LLA) coverage of impaired loans of (96 per cent at end-1H21) was high and above peers’.
“Stage 2 loans (20 per cent of gross loans at end-1H21; average LLA coverage of 3.6 per cent) have increased significantly as a result of the pandemic, and are concentrated, but are not expected to lead to a material increase in impaired loans,” it added.
However, it observed that “Sterling delivers adequate profitability – as indicated by operating returns on risk-weighted assets that have averaged 1.4 per cent over the past four full years – notwithstanding its high cost base reflecting its limited economies of scale.
“Margins are reasonable and in line with peers’, underpinned by lending to higher-margin segments and, in 2020 and 1H21, growth in low-cost deposits. Loan impairment charges (LICs) continue to weigh on performance (1H21: equal to 35 per cent of pre-impairment operating profit).”
Sterling’s FCC ratio (14.5% at end-1H21) is a rating strength at the current rating level, underpinned by moderate pre-impairment operating profit (equal to 2.6% of average gross loans over the past four full years) and full LLA coverage of impaired loans. Its capital adequacy ratio (CAR; 15%) is comfortably above its 10% minimum requirement.
At Sterling, the report averred, funding was mainly from customer deposit (78 per cent in naira; 22 per cent in FC at end-2020).
“Single-depositor concentration is moderate, with the 20-largest deposits representing 20% of customer deposits at end-1H21. However, FC single-depositor concentration is exceptionally high, with the two-largest depositors representing 34 per cent of FC customer deposits.
Fitch captured loans/deposits ratio at 66 per cent, which it described as low, and asserted that liquidity coverage was strong in local currency but weak in FC in the context of high concentration risk.
Support Rating and Support Rating Floor
Sovereign support to commercial banks cannot be relied on given Nigeria’s weak ability to provide support, particularly in FC.
National Ratings
Sterling’s National Ratings are driven by the bank’s standalone strength. The upgrade of Sterling’s National Long-Term Rating reflects the bank’s increased creditworthiness relative to other Nigerian issuers’.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Erosion of capital buffers to levels close to or below the bank’s minimum regulatory requirements, which could result from a significant increase in impaired loans leading to losses.
A significant tightening in FC liquidity, most likely due to single-depositor concentration risk.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside to the ratings is unlikely at present unless the bank’s franchise and funding and liquidity profile materially strengthen.
