May 10, 2020/Fitch Ratings
Fitch Ratings has maintained Access Bank Plc’s ‘A+(nga)’ National Long-Term Rating and ‘F1(nga) National Short-Term Rating on Rating Watch Negative (RWN).
The rating actions follow a review of Access’s creditworthiness relative to other Nigerian issuers. Fitch has recalibrated the Nigerian National Ratings scale following the sovereign downgrade on 6 April.
Resolution of the RWN will depend on the fallout from the oil price crash and the impact of the coronavirus pandemic on the bank’s credit profile. Fitch will focus on the bank’s asset quality and capital metrics as these have been pressured by the acquisition of troubled Diamond Bank in April 2019.
Access reported an impaired (Stage 3)/gross loans ratio of 5.9% and loan loss allowances/impaired loan ratio of 108% at end-1Q20. While the impaired loan ratio is in line with peers, its Stage 2 loans/gross loans ratio remains high at 28.0% at end-1Q20 (end-2019: 30.7%).
The majority of Stage 2 loans were inherited from Diamond and these may not migrate to Stage 3 due to pre-emptive and regular restructuring which commenced in 2019. As we understand, 67% of the Stage 2 book is in naira, protecting Access from asset quality and devaluation risks to some extent. Furthermore, Access made some progress in the first three months of the year in reducing Stage 2 oil and gas loans to 13.8% of the total at end-1Q20 (end-2019: 16.5%). Of the stage 2 loans, the oil and gas related loans are the ones we view as potentially risky given the current low oil prices.
Access’s Tier 1 and total capital ratios rose to 17.3% and 20.9% at end-1Q20. Access plans to enhance regulatory capital ratios in 2020 through higher retained earnings, thanks to its solid revenue generating capacity that has been boosted by the acquisition, notwithstanding the pandemic. Access will remain profitable in 2020 due to strong margins (including further improvement in its cost of funding), robust non-interest income and lower operating expenses post-merger.
Key Rating Drivers
Access’s National Ratings reflect its creditworthiness relative to other issuers in Nigeria and are driven by its standalone strength. They are lower than the highest -rated Nigerian peers due to its comparatively weaker profitability and capitalisation metrics.
Access’ National Short-Term Rating is the lower of the two options for a ‘A+(nga)’ National Long-Term Rating possible under Fitch’s criteria, reflecting potential risks to funding and liquidity from market instability.
Access’ naira-denominated subordinated debt rating is ‘A-(nga)’, in line with the two-notch base case in our criteria.
The RWN on the bank’s National Ratings and debt rating reflects our expectation that like its Nigerian peers, Access will face material pressures from a weaker operating environment over the next few months given the oil price crash, potential further devaluation of the Nigerian naira and the impact of the coronavirus pandemic on individuals and businesses. It also reflects the bank’s comparatively weaker capital ratios than direct peers.
Rating Sensitivities
Access’s National Ratings are sensitive to a change in its creditworthiness relative to other Nigerian issuers.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Access’s National Ratings could be downgraded if its regulatory tier 1 and total capital ratios do not catch up with peers during 2020. A substantial weakening in asset quality metrics compared with peers could also trigger a downgrade.
Similar to peers, downside risk will also arise from a weakening in the bank’s standalone credit profile. Nigerian banks face very challenging conditions due to pressures in the domestic operating environment. Downside risks are heightened by the coronavirus outbreak especially if the current lockdown, oil price weakness and global economic turmoil extend into 2H20, giving rise to a more severe economic and financial market fallout than currently expected.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Upside to the ratings is unlikely at present but could come from a sustained improvement in financial metrics from Access’s larger franchise and more-diverse business model.
In accordance with Fitch’s policies, the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions 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.
