Nigeria’s Sovereign Debt Downgrade drags 8 Banks along

Tier 1 Nigerian Banks are in recent times more keen to hold money in government issued security than lend money to eligible corporate entities to do business, a lack of access to credit which is a principal factor in companies floating their own corporate bonds to raise money from the debt capital market, like the 4 tranche series 40.00 billion naira first rate bonds Dufil Prima (makers of the popular food staple, indomie) raised through Stanbic IBTC Capital Markets only last week monday.

Reports show that Guaranty Trust Bank Plc holds 965bn in cash that it doesn’t plan to give out as loans to businesses. Two weeks ago, Abebe Aemro Selassie, the Head of IMF Africa stressed the importance of the Nigerian Government to widen the tax bracket and increase the non-oil revenue while also making the banks to give access to credit to businesses, in order to create the jobs and increase the productivity the economy needs to improve its GDP growth.

Moody’s the global rating agency has caught up with the anomaly in the banking system and in a statement on 8 of the top Nigerian Banks says ”Moody’s Investors Service (Moody’s) has today downgraded to B2 from B1 the long-term local currency deposit and issuer ratings of four Nigerian banks — Access Bank Plc (Access), Guaranty Trust Bank Plc (GTBank), United Bank for Africa Plc (UBA) and Zenith Bank Plc (Zenith) and the long-term local and foreign currency issuer ratings of Bank of Industry, a Nigerian development bank. Moody’s also downgraded to B3 from B2 the long-term foreign currency deposit ratings of Access, GTBank, UBA and Zenith, as well as those of Union Bank of Nigeria plc (Union), First Bank of Nigeria Limited (FBN) and Sterling Bank Plc (Sterling). Concurrently, Moody’s downgraded the baseline credit assessments (BCAs) of Zenith and GTBank to b2 from b1”

Moody’s says the decision to downgrade these banks is linked closely with the decision to downgrade the Sovereign rating from B1 to B2, giving two very important reasons the Central Bank should look into:

  1. The government’s reduced capacity to provide support to Nigerian banks in times of stress
  2. The banks’ significant holdings of government securities linking their credit profiles to that of the government. The decision to downgrade banks’ long-term foreign currency deposit ratings follows the downgrade of the relevant country ceiling for foreign currency deposits to B3 from B2.

You would recall that on the 30th of October 2017, the IMF Chief of Nigeria, Amine Mati said at the Chartered Institute of Bankers of Nigeria Annual Lecture in Lagos “We believe the banking sector should be strong to support the economy. So it is important we recapitalise the banks to make sure that they are very strong. The regulators should try to make sure that the banks operate in line with international standards to be able to withstand any shocks“. So its interesting to note that Moody’s is supporting this position of the IMF by further stressing that “The secondary driver of today’s rating action is the Nigerian banks’ significant holdings of government securities, which generally exceed 100% of their core capital, linking their credit profile to that of the government. In view of the correlation between sovereign and bank credit risk, the banks’ standalone credit profiles and ratings are constrained by the rating of the government.”

Moody’s says further “Access’ and UBA’s long-term local currency deposit ratings and Bank of Industry’s long-term issuer ratings no longer benefit from a one-notch uplift from their b2 BCAs (or standalone credit profile, as is the case for Bank of Industry) as these are now at the same level as the government bond rating. The long-term local currency deposit ratings of Sterling, Union and FBN have been affirmed at B2, as their b3 BCAs continue benefiting from one notch of government support uplift.” And that ” the BCAs for Zenith and GTBank have been downgraded to b2 from b1, in line with the downgrade of the government issuer rating, despite the resilient financial performance witnessed by both banks over the last 24 months”

This downgrade reduces the corporate bond quality of Nigerian Banks and poses  systemic risk to the financial system, should the warnings and lessons not heeded over the long term.

Kelvin Emmanuel

About Kelvin Emmanuel

The Oil producing Angola in the Southern part of Africa faces what Nigeria faced 12months ago; a distortion in its exchange rate with a difference between the official markets and the parallel black markets. One dollar through the official window buys you 166 kwanza, while one dollar through the black market buys you 400 kwanza. Nigeria faced the same challenge 12months ago, when the distortion between the official and black markets was as much as the official markets trading at 306 with the parallel market ranging from 450 through to 510. The Central Bank Governor of Angola, Jose de Massano Junior announced in Luanda “We will stop having a fixed foreign exchange, we will adopt a floating regime of foreign exchange”. Angola faces exactly the same challenges and has been applying the exact same responses to an exchange rate crisis like using its foreign reserves that was sitting at $26bn to defend the currency kwanza, with no success so far, even though the external reserves has dropped to $14bn. Angola relies on Oil receipts for 80% of its government revenue, 90% of its inflow and 50% of its GDP. Angola is a $194bn economy that has been growing at an average of 10% on the back of rising oil prices since 2002 when its 27 year old civil war that started in 1975 ended. The state national oil company Sonangol reports that it produces up to 1.8m barrels of crude oil daily, however the government that until now has being led by the family dynasty Jose Eduardo dos Santos until recently when succession saw power transferred to Joao Lourenco, reports that the oil price rout in 2015/2016 that saw prices drop to as low as $28 per barrel caused ripples across the economic structures of the government, upsetting government revenues, its ability to fund its budget, capital project funding, foreign direct investments into the economy as a result of a currency crisis that was driven by the widening of gap between the official and street window of the kwanza, that until now has been pegged in a fixed exchange rate regime to the US Dollar.