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    Fitch Rates Nigeria’s GTBank, Ghanaian Subsidiary at ‘B’; Outlook Stable

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    Fitch Ratings has assigned Guaranty Trust Bank (Ghana) Limited (GTB Ghana) a Long-Term Issuer Default Rating (IDR) of ‘B’. The Outlook is Stable. A full list of rating actions is detailed below.

    KEY RATING DRIVERS

    IDR AND VIABILITY RATING

    The Long and Short-Term IDRs of GTB Ghana are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR) of ‘b’. The ratings consider the concentration of its operations in the challenging Ghanaian operating environment, its small market shares, high credit concentrations and ambitious growth strategy. These considerations are balanced against the bank’s healthy asset quality and strong profitability, capitalisation and liquidity coverage.

    GTB Ghana has small market shares of assets and customer deposits (both 3% at end-2020) but its franchise benefits from being a subsidiary of Guaranty Trust Bank PLC (GTB PLC), Nigeria’s fifth-largest banking group. Market shares are expected to increase moderately over the next three years as GTB Ghana grows faster than the sector average with the objective of becoming a systemically important bank. However, this target is challenging due to the bank’s current market position and Ghana’s highly competitive banking sector.

    Single-borrower credit concentration is high, with the bank’s 20-largest loans representing 83% of gross loans at end-2020. However, these 20 largest exposures represented just 87% of total equity, reflecting GTB Ghana’s large capital base and a low share of loans in total assets. Our risk appetite assessment also considers strong loan growth in recent years, driven by corporate lending that we expect to continue and may lead to pressure on asset quality in the event of a relaxation of underwriting standards.

    GTB Ghana’s impaired loans (Stage 3 loans under IFRS 9) ratio (1% at end-1Q20) is significantly lower than the banking sector average (15.3% at end-2M21). The percentage of gross loans benefitting from restructured terms as a result of the pandemic declined to 1% at end-1Q21 from 14% at end-2020 as a result of a few large exposures resuming regular payment schedules. Our asset-quality assessment also considers the bank’s small loan book (27% of total assets at end-1Q21) and large holdings of Ghanaian government securities (B/Stable; 51% of total assets at end-2020).

    Profitability is strong, as indicated by an operating return on risk-weighted assets (RWAs) of 17% in 2020. Profitability is underpinned by Ghana’s high interest-rate environment and strong non-interest income, primarily in the form of retail fees and trading income, which represented 49% of total operating income in 2020. Reliance on sovereign-derived interest income is particularly high (64% of total interest income in 2020) due to large holdings of government securities. Loan impairment charges equalled just 0.4% of average gross loans in 2020, reflecting the limited impact of the pandemic on asset quality.

    GTB Ghana’s common equity Tier 1 (CET1) capital ratio (35% at end-1Q21) is particularly high, reflecting a balance sheet that exhibits low leverage, but is considered in view of the bank’s fairly low risk weight density (53% at end-2020). Pre-impairment operating profit, which equalled 55% of average gross loans in 2020, provides a large buffer to absorb asset-quality pressures without deterioration of capital. Fitch expects GTB Ghana’s CET1 capital ratio to remain high despite strong loan growth envisaged by management, supported by strong profitability and intention to maintain high capital buffers.

    Reliance on non-deposit funding is low, with customer deposits representing 92% of total funding at end-1Q21. A high percentage of demand and savings accounts (87% at end-2020) and a healthy share of retail deposits (51% at end-2020) support funding stability and result in a low cost of funding relative to peers’. Depositor concentration is moderate by regional standards, with the 20-largest deposits representing 24% of total customer deposits at end-2020. GTB Ghana’s low gross loans/customer deposits ratio (40% at end-2020) is reflective of a highly liquid balance sheet.

    SUPPORT RATING

    GTB Ghana’s Support Rating of ‘5’ reflects our view that support from GTB PLC, although possible, cannot be relied on, notably due to the cross-border nature of the parent-subsidiary relationship. This is despite a high propensity to provide support given its 98% ownership, common branding, the high level of management and operational integration and the bank’s strong performance record. It also considers the bank’s strategic importance to GTB PLC’s regional network, given that it represented 11% of the group’s profit-before-tax in 2020.

    We also see a risk of regulatory restrictions in Nigeria, particularly concerning foreign-currency flows out of the country, that could constrain GTB PLC’s ability to provide timely and sufficient support to foreign subsidiaries.

    RATING SENSITIVITIES

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

    – Stronger-than-expected loan or balance-sheet growth or 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. This may be indicated by a sustained decline in the bank’s tangible common equity/tangible assets ratio to around 12%.

    – 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. However, this is not our base case given the Stable Outlook on Ghana’s Long-Term IDR of ‘B’.

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

    – An upgrade would require a sovereign upgrade and an improvement in the operating environment.

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