The recent rating upgrade assigned to Access Bank Plc by Fitch attests to the bank’s quality of leadership and risk management framework, writes Obinna Chima
With the elongated decline in crude oil prices as well as foreign exchange restrictions in the country, it is believed that Nigerian banks are facing significant asset quality risks that could crystallise in the near term.
A report by Renaissance Capital (RenCap) which gave this verdict, also predicted that if the difficult conditions persists, there might be need for some banks to recapitalise or face forced mergers, with the regulator stepping in to coordinate the process.
However, they stressed that although banks were presently not assuming, any of the aforementioned scenarios could play out, the picture over the past three years according to them were obvious signs on the wall that investors should not ignore. They listed these signs to include increased regulation and the recent revision of Basel 2 guidelines, which takes off 2-4 percentage points on average from the capital adequacy ratio (CAR) of some banks; the low interest rate environment, and what they described as the highly uncertain economic management direction.
While they maintained that the sector’s risk management had significantly compared to the 2009 crisis, they pointed out that the prolonged and continuous decline in oil prices presented the sector with unprecedented scenarios that risk management systems at both the banks and regulator would have to deal with for the first time on this scale.
According to the firm, the risks had arisen not solely from the impact of low oil prices on the direct lending the banks had made to oil and gas firms, but also from the ancillary impact this has had on economic growth, which has declined to two-three per cent from five-six per cent historically, and forex liquidity, which has materially affected the CBN’s ability to satisfy demand for forex.
Nigeria, Africa’s largest economy, saw a decline in the number and value of deals last year with regulatory uncertainty, falling oil prices and weakening of the naira all contributing to investor caution in the mergers and acquisition space in the country, a separate report by Mergermarket shows.
For the country, 2015 saw a decline in both the number and value of mergers and acquisition deals. There were 25 transactions worth $3.2 billion last year, a 22 per cent decline from the number of deals in the previous year—32—and a 65 per cent plunge in the overall value of those deals, from $9.2 billion in 2014.
“Nigeria has been facing some challenges with exchange rates and clamours for devaluation, so we’re probably not as competitive when it comes to outbound deals,” Quartz Africa, quoted the head of financial advisory and equity capital markets at FBNQuest, Afolabi Olorode, to have said.
Nonetheless, despite what appears like a stormy sea for banks, few financial institutions like Access Bank have held their heads high.
Access Bank is one of the leading full service commercial bank with headquarters in Nigeria, and operations across major cities and commercial centres in Sub-Saharan Africa, the UK, China and the UAE.
Fitch Ratings Upgrade
For instance, amid the haze in the banking industry, global rating agency Fitch Ratings recently upgraded Access Bank’s long-term national ratings with a stable outlook.
The global credit ratings and research firm also affirmed the Long-term IDRs of Access Bank and National Ratings. The National Rating of the bank was also upgraded to ‘A(nga)’/‘F1(nga)’ from ‘A-(nga)’/‘F2(nga),’ to reflect what it termed, the improvement in creditworthiness over time relative to peers in Nigeria. In Fitch’s opinion, banks will continue to face multiple threats in the course of 2016, particularly from tight foreign currency liquidity, worsening asset quality and pressure on regulatory capital ratios. However, Access’ Viability Rating (VR) was affirmed as these risks are to a large extent already captured in the ratings.
The Long-term Issuer Default Ratings (IDR) of Access remained on Stable Outlook as the rating is driven by its VR and there was no expectation of any material change in the bank’s intrinsic creditworthiness.
“Access’ Support Rating Floor (SRF) of “4” reflects the authorities’ unchanged ability and willingness to provide extraordinary support. The agency believes that while there is a limited probability of external support, the authorities have a stronger ability to support the bank’s local currency obligations if required. The senior debt rating of Access (issued via Access Finance BV) is in line with its long-term IDR. The senior debt rating is affirmed due to the affirmation of the bank’s long-term IDR.
“Access Bank’s major strengths, which underpin its long- and short-term ratings, include its size and franchise, its strong risk management and the group’s solid capitalization.
“The bank’s improved rating further reinforces its resolve to deliver leading innovative and differentiated products and services to its customers in its quest to become the world’s most respected African bank by 2017,” a statement from Fitch explained.
In the same vein, during the third quarter of 2015, Moody’s Investors Service, one of the top three global leading rating agencies had also assigned first-time foreign currency issuer and local currency deposit ratings of Ba3 with stable outlook to the bank. The agency had also assigned Access Bank a Counterparty Risk Assessment (CRA) of Ba3 (cr) / Not Prime (cr). The ratings were underpinned by a b2 Baseline Credit Assessment (BCA), which measure an issuer’s standalone financial strength.
“Access Bank’s b2 standalone profile reflects solid asset quality metrics, underpinned by tangible improvements in loan underwriting standards and risk management in recent years; robust capital and liquidity buffers, supported by sustainable internal capital generation; and a stable liability structure predominantly funded with deposits,” Moody’s had said.
The agency explained that the these strengths are balanced against Nigeria’s challenging operating environment, which takes into account the strong growth potential of the system and institutional and structural weaknesses, as well as the concentration risks on the bank’s books, including to the oil and gas industry. However, the agency noted that Access Bank was very well positioned to weather the macroeconomic challenges and they expect its standalone credit profile to remain resilient.
Clearly, the ratings were influenced by the bank’s performance in its third quarter 2015 results. Access Bank had recorded gross earnings of N258 billion as at the end of September 2015, representing an increase of 42 per cent over the N182 billion posted in the same period in 2014 with total contribution of interest income at 60 per cent and non-interest income at 40 per cent.
Similarly, its non-interest income then, also rose 106 per cent to N102 billion in 2015 from N50 billion in 2014, while operating income grew by 42 per cent to N178 billion, from N126 billion in the corresponding period of 2014. Also, Access Bank’s profit before tax at the end of September 2015, grew by 44 per cent, rising from N41.745 billion in 2014 to N60.372 billion in 2015, just as profit after tax went up by 37.7 per cent to N48.1 billion in 2015, compared with N34.935 billion in 2014.
Access Bank’s contribution to the economy was reflected in the nine months results as the bank grew its loans and advances increased by 21.5 per cent to N1.312 billion, from N1.079 billion.
Commitment to Excellence
The Group Managing Director, Herbert Wigwe has assured all stakeholders that the bank would continue to maintain strong growth in earnings to reflect its commitment to continue to deliver quality service.
“We continue to invest in technology, enhance our processes and improve service delivery whilst reducing cost as we deploy simple and efficient digital solutions to meet the needs of our customers. The recent upgrade of our core banking applications will act as catalyst for the sustainable growth of our retail base and deepen our share in key focus market segments.
“We are now making huge strides in gaining retail market share and becoming a key player as the bank deploys bespoke services for specific segments of the retail market including women, children and the youth.
“As the business continues to grow, we maintain our moderate risk appetite as underlined by our recent credit rating upgrade from Nigeria’s foremost rating agency. I am excited by the group’s potential and confident in our objective to become the world’s most respected African Bank,” Wigwe had said.