International credit ratings agency, Fitch Ratings, has affirmed Togo-based Ecobank Transnational Incorporated’s (ETI) Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook.
Fitch Ratings affirmation of ETI’s Long-Term IDR at ‘B-‘, implies that bonds issued by the group are of a non-investment grade and present an appreciable level of credit risk with the group possibly defaulting on payments of coupon rates or face value of bonds at maturity.
The rating action, Fitch notes, is driven mainly by ETI’s intrinsic creditworthiness, as defined by its ‘b-‘ Viability Rating (VR) and the group’s consolidated risk profile which reflect excessive double leverage (above 120 percent), reflecting higher default risk arising from structural features.
According to Fitch, ETI’s double leverage (defined as equity investments in subsidiaries divided by the Bank’s Holding Company equity) at the end of 2020, remained significant at 153 percent (end-2019: 155 percent) as higher retained earnings at the group level only modestly offset lower dividends up-streamed by its subsidiaries due to dividend pay-out restrictions by certain national regulators such as the Bank of Ghana (BoG).
“We expect ETI’s double leverage to decrease to 140 percent by end-2022, in line with the management guidance, supported by resumed dividends from subsidiaries, stronger performance and continuing earnings retention at the Bank Holding Company (BHC) level,” said Fitch.
Read below the full rating action commentary by Fitch Ratings:
Fitch Affirms Ecobank Transnational Inc at ‘B-‘; Outlook Stable
KEY RATING DRIVERS
IDRS AND VR
ETI is the bank holding company (BHC) of the pan-African Ecobank Group that operates in 35 countries on the continent. The IDRs are driven by ETI’s intrinsic creditworthiness, as defined by the ‘b-‘ VR. The VR is notched down from the level implied by Fitch’s assessment of the group’s consolidated risk profile to reflect excessive double leverage (above 120%) at the BHC level, reflecting higher default risk arising from structural features.
At end-2020, ETI’s double leverage (defined as equity investments in subsidiaries divided by BHC equity) remained significant at 153% (end-2019: 155%) as higher retained earnings at the BHC level only modestly offset lower dividends up-streamed by its subsidiaries due to dividend pay-out restrictions by certain national regulators.
We expect ETI’s double leverage to decrease to 140% by end-2022, in line with the management guidance, supported by resumed dividends from subsidiaries, stronger performance and continuing earnings retention at the BHC. ETI was not required to inject capital into subsidiaries in 2020 and we expect the same in 2021-2022; its main subsidiaries (especially Nigeria) show comfortable capital buffers over minimum regulatory requirements. Downside risks to our double leverage forecasts include continuing depreciation of regional currencies against the US dollar and, in particular, persisting pressure on the Nigerian naira.
Net operating cash flows at ETI (dividend and other payments to the BHC less BHC net debt servicing and operating expenses) were negative in 2020, similar to the prior year, due to lower up-streamed dividends. These trends are likely to gradually reverse and Fitch expects net operating cash flows to turn slightly positive in 2021.
Risks from excessive double leverage and negative net operating cashflows at BHC are partially offset by ETI’s prudent liquidity management and contingency plans, and liquidity fungibility within the group. ETI’s standalone liquidity includes cash and interbank placements within and outside the sub-Saharan Africa (SSA) region. The latter amounted to USD41 million while interbank placements with affiliates was USD218 million at end-2020. Additionally, if required, ETI has access to substantial group liquidity through its inter-affiliate placement programme (average monthly balances of USD611 million during 2020) as part of its centralised liquidity management. As a result, the Stable Outlook reflects our view that our base case is ETI’s liquidity buffers will remain comfortable over 2021 and 2022 to meet its financial obligations.
ETI’s stage 3 loans ratio decreased to 7.7% at end-2020 from 9.7% at end-2019, driven by recoveries and write-offs especially at Ecobank Nigeria (ENG; B-/Stable). Stage 2 loans were a further 12.7% of gross loans at end-2020 with a concentration in the oil and gas sector. We expect the group’s stage 3 loans ratio to gradually decline to 7% by end-2022 with the resolution of large impaired exposures in the oil and gas sector helped by a recovery in oil prices.
ETI is highly revenue-generative. The group’s pre-impairment operating profitability was up 8% year-on-year, supported by a sharp reduction in its cost of funding by about 110bp and lower operating expenses. Fitch’s core profitability metric, operating profit/risk-weighted assets (RWAs), was down only 30bp to 2.4% in 2020, driven by a large increase in loan impairment charges. We expect the core profitability metric to rise to about 2.5%-3% in 2022 with improving asset quality and recovering business conditions.
Capitalisation is a rating weakness in light of still high country risks and its sensitivity to foreign-currency translation losses. ETI’s common equity Tier 1 (CET1) ratio improved to 9.2% at end-2020 from 8.8% at end-2019, driven by full earnings retention and flat RWA growth. The total capital adequacy ratio under Basel II/III of 12.3% at end-2020 provided comfortable buffer of 100bp over the regulatory minimum. We expect the group to maintain adequate regulatory capital buffers in 2021-2022, even though the contribution of its USD400 million convertible bond due in 2022 to tier 2 capital is diminishing.
ETI’s core funding profile is solid, benefiting from geographically diversified low-cost current and savings accounts (82% of total customer deposits at end-2020), complemented by diverse market funding. The group has a substantial cushion of liquid assets (including net bank placements, short-term debt securities and cash balances less mandatory reserves) of about USD6 billion, equal to 33% of total customer deposits at end-2020.
SUPPORT RATING AND SUPPORT RATING FLOOR
ETI’s Support Rating (SR) of ‘5’ and Support Rating Floor (SRF) of ‘No Floor’ reflect our opinion that support cannot be relied upon for ETI, a holding company, from any sovereign authority.
Fitch believes that some of the group’s key subsidiaries could be supported by their respective national authorities, but such support is unlikely to extend to ETI itself. While Nedbank Group Limited (BB-/Negative; 21.2% shareholding) and Qatar National Bank (A+/Stable; 20.1%) are long-term and strategic investors in ETI, their current stakes in the group and the limited integration of operations mean that institutional support cannot be relied upon. As a result, institutional support is not factored into the ratings.
ETI’s USD500 million senior unsecured notes are rated in line with the group’s Long-Term IDR as these notes constitute the BHC’s direct, general, unconditional, unsubordinated and unsecured obligations and rank equally among themselves and with all of ETI’s other senior obligations.
Its Recovery Rating of ‘RR4’ reflects average recovery prospects.
IDRs and VR
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Eroding liquidity buffers at the BHC due to stricter regulatory or other restrictions would lead to a downgrade of the ratings. Liquidity pressure at a consolidated level will also exert negative rating pressure.
Ratings are also sensitive to material deterioration in asset quality and profitability. A sustained increase in the group’s stage 3 loans ratio to above 11% weighing on operating profitability could lead to a downgrade of the VR. The VR could also be downgraded if core Tier 1 capital buffer drops below 100bp over the regulatory minimum.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of ETI would require a decline in the BHC’s double leverage to below 120% along with the maintenance of reasonable financial metrics as operating conditions stabilise.