Fitch Ratings has affirmed Sterling Bank Plc’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook.
The National Long-Term Rating has been upgraded to ‘BBB+(nga)’ from ‘BBB(nga)’, reflecting the bank’s increased creditworthiness relative to that of other issuers in Nigeria.
Key Rating Drivers
Issuer Default Ratings and Viability Rating
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 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.
Operating conditions in Nigeria are gradually stabilising. Fitch forecasts 1.9% GDP growth in 2021, following a 1.8% 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 (CBN).
Sterling has a fairly small franchise, representing 3% of domestic banking-system assets at end-2020. Single-borrower concentration is high, with the 20-largest customer loans representing 53% of gross loans or 286% of Fitch Core Capital (FCC) at end-1H21.
Its oil and gas exposure has reduced in recent years but remains material, representing 26% of gross loans or 139% 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.
Sterling’s impaired loans (Stage 3 loans under IFRS 9) ratio increased to 2.9% at end-3Q20 from 2.2% at end-2019, as a result of the pandemic, but declined to 1.8% by end-1H21 on write-offs and robust loan growth. Specific loan loss allowance (LLA) coverage of impaired loans (96% at end-1H21) is high and above peers’.
Stage 2 loans (20% of gross loans at end-1H21; average LLA coverage of 3.6%) 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.
Sterling delivers adequate profitability – as indicated by operating returns on risk-weighted assets that have averaged 1.4% 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% 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.
Funding is mainly in the form of customer deposits (78% in naira; 22% in FC at end-2020). The share of current and savings accounts (82% of customer deposits at end-1H21) has increased in recent years, reducing reliance on more price-sensitive and concentrated term deposits.
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% of FC customer deposits.
Its loans/deposits ratio is a low 66%. Liquidity coverage is 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. The Support Rating Floor of all Nigerian banks is ‘No Floor’ and all Support Ratings are ‘5’.
This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.
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’.
Sterling’s National Short-Term Rating of ‘F2(nga)’ is the lower of two possible options for a National Long-Term Rating of ‘BBB+(nga)’ under Fitch’s criteria, reflecting weaknesses in the bank’s funding and liquidity profile, which increases the vulnerability of default on its short-term local-currency obligations within Nigeria.
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.
The National Ratings are sensitive to Fitch’s view of the entity’s creditworthiness relative to other Nigerian issuers’.
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.
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.