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Fitch Affirms Ecobank Transnational Inc at 'B'; Outlook Stable
August 10, 2017 / 5:35 PM / a month ago

Fitch Affirms Ecobank Transnational Inc at 'B'; Outlook Stable

(The following statement was released by the rating agency) PARIS, August 10 (Fitch) Fitch Ratings has affirmed Togo-based Ecobank Transnational Incorporated's (ETI) Long-Term Issuer Default Rating (IDR) at 'B'. The Outlook is Stable. ETI is the holding company of the pan-African Ecobank group. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs and VIABILITY RATING Fitch rates ETI, a diversified bank holding company, based on the consolidated risk profile of the group. ETI's Long and Short-Term IDRs are therefore, driven by the group's intrinsic creditworthiness, as captured in the group's 'b' Viability Rating (VR). The VR takes into consideration the challenging and volatile operating environments in Sub-Saharan Africa (SSA), and particularly in Nigeria. It also factors in ETI's weak asset quality, poor performance due to high loan impairment charges (LICs), which also extend to pressure on its capitalisation. Geographic diversification underpins the VR, as ETI's banking subsidiaries span 33 SSA countries. Our assessment of the operating environment reflects low-rated sovereigns in the region (typically in the 'B' range and several with Negative Outlooks), pressure on economies from low commodity prices and unpredictable policies as well as developing financial markets and regulatory frameworks. ETI is regulated by the Commission Bancaire, the supervisory authority of the Central Bank of the Western African Monetary Union and not by the Togolese authorities. About 30% of ETI's assets are in Nigeria (B+/Negative) through its 100%-owned subsidiary Ecobank Nigeria (ENG). The operating environment in Nigeria remains stressed due to the economic impact of low oil prices and the consequent depreciation of the Naira and shortage of foreign currency. ENG (as with its other Nigerian peers) faced significant asset quality deterioration in 2016, resulting in ETI setting up a fully owned resolution vehicle (RV) to acquire the subsidiary's problem loans with a carrying value of USD263 million for a cash injection of USD200 million (and a transfer of an asset valued at USD63 million). The cash injection strengthened ENG's liquidity and capitalisation. At the same time, the problem loans acquired by the RV were fully impaired by ETI, resulting in a significant rise in consolidated LICs and in the group reporting a USD205 million net loss for 2016. ETI's company profile benefits from franchise and business model strengths and a simple organisational structure. ETI operates under a single brand and operating platform across its broad network. Management quality is a rating strength; however, current management's record in the group is short. The group is able to recruit highly experienced senior management from the region and internationally. Group managers are based in Lome with close interaction with managements of subsidiary banks. ETI's strategy is based on consolidating the group's operations and strengthening the platform and delivery channels through digitalisation. ETI benefits from synergies with its strategic shareholders Nedbank Group Limited (BB+/Stable) and Qatar National Bank Q.P.S.C. (QNB, AA-/RWN). Synergies come from cross-border banking as well as the sharing of technical skills, strong governance practices and risk management expertise. We also believe that ETI has addressed its widely publicised legacy corporate governance problems. ETI has a lower risk appetite than in the past and with an increasing emphasis on improving risk controls. Legacy problem loans are being actively addressed, but Fitch believes their resolution will be a long-lasting process. ETI's asset quality remains vulnerable given the group's significant exposure to volatile emerging industries/sectors and low-rated sovereigns. ETI's impaired loans ratio deteriorated further at end-2016 to 9.6%, from 8.2% at end-2015, due to further deterioration of the loan portfolio in Nigeria and west-Africa. Reserve coverage of 64 % at end-2016 is still weak, in our view. One of ETI's key strengths is the capacity to generate solid earnings and pre-impairment operating profitability from the group's network. On a standalone basis, ETI's main source of income is from dividends and management fees up-streamed from subsidiaries. We believe that ETI's capitalisation remains under pressure. ETI's Fitch core capital ratio (FCC) declined to 11.1% at end-2016, from 14.1% at end-2015, due to its net loss for the year and substantial foreign currency translation losses on foreign operations (as included in other comprehensive income). For these reasons, ETI's tangible common equity / tangible assets ratio also declined to 7.1% at end-2016 from 9.2% at end-2015. ETI is heavily exposed to structural foreign exchange risk from its operations in different currencies. Prominent currency exposures are to the CFA franc (which is effectively pegged to the euro), Nigerian Naira and Ghanaian Cedi. During 2016 all of the main currencies depreciated heavily against ETI's reporting currency, the US dollar. The cumulative effect was a USD625 million translation loss upon consolidation at end-2016, equalling 25% of the group's opening shareholders' equity. Net investment hedges (as per IFRS) are not in place to mitigate this material risk as suitable derivative instruments are often not available. Therefore, we expect translation losses to be an ongoing source of volatility for the group's capitalisation. ETI's double leverage ratio (110% at end-2016) is moderate and we expect this to remain stable given that plans are afoot to raise new funding to refinance existing debt at the group level and our expectation that lending growth is likely to ease. ETI's standalone funding profile is sound, supported by healthy access to market funding. On a group basis, ETI's funding mix benefits from a diversified customer deposit base with retail deposits representing about half of total deposits. Liquidity is fungible to some extent across the network through an established "inter-affiliate placement programme". The Stable Outlook reflects our expectations that the group's risk profile will remain stable, underpinned by diversification benefits that will help to overcome pressures in certain key markets. SUPPORT RATING AND SUPPORT RATING FLOOR ETI's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect Fitch's opinion that sovereign support for the group cannot be relied on. This reflects Fitch's view that Togolese authorities (ETIs domicile) would have extremely limited propensity to support the group. Although Ecobank Nigeria, the group's largest subsidiary, may receive support from the Nigerian authorities, if required, this is unlikely to extend to ETI or other parts of the group. Similarly, Fitch believes that some of the group's other important subsidiaries could be supported by their respective national authorities, but such support is unlikely to extend to ETI itself. While Nedbank and QNB 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. RATING SENSITIVITIES IDRs AND VIABILITY RATING Continuing worsening in the operating environment could lead to a downgrade of ETI's VR and consequently the IDRs. Ratings are also sensitive to a weaker funding and liquidity profile, deterioration in asset quality, which would put further pressure on the group's capital position. ETI's IDRs may also be downgraded on a material increase of double leverage, or if restrictions are put in place that would impair the ability of ETI's subsidiaries to upstream dividends or generate management fees. Upside to the VR is limited at present given the volatile and challenging environment in which ETI operates. SUPPORT RATING AND SUPPORT RATING FLOOR The SR is unlikely to be upgraded or the SRF revised upwards, as we believe it is highly unlikely that either the Togolese or Nigerian authorities' propensity to provide support to the group would change. The rating actions are as follows: Ecobank Transnational Incorporated: Long-Term IDR: affirmed at 'B'; Stable Outlook Short-Term IDR: affirmed at 'B' Viability Rating: affirmed at 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' CRITERIA VARIATION Fitch's Global Bank Rating Criteria envisages that Bank Holding Company (BHC) ratings are equalised with, or lower than, the main operating subsidiary of the group. In the case of ETI, there is no dominant operating subsidiary (Ecobank Nigeria is the largest representing 30% of group assets at end-2016) and instead the group's subsidiaries span 33 sub-Saharan countries. As such, Fitch has varied its criteria to base the BHC's ratings solely on the consolidated risk profile of the group rather than relating to the VR of a main operating subsidiary. Under Fitch's Global Bank Rating Criteria, Fitch's assessment of sovereign support considers the ability and propensity of the sovereign to provide support. In respect of ETI, which is domiciled in Togo, Fitch assesses the propensity of the Togolese authorities to provide support to be extremely limited and as such has not assessed the authorities' ability. Additionally, Fitch has considered possibility of support from the Nigerian authorities. This assessment led to a Support Rating Floor of 'No Floor'. This variation has not resulted in any change to the rating. Contact: Primary Analyst Eric Dupont Senior Director +33 144 29 91 31 Fitch France S.A 60 Rue de Monceau 75008 Paris Secondary Analyst Mark Cordwell, CFA Analyst +44 20 3530 1644 Committee Chairperson Artur Szeski Senior Director +48 22 338 6292 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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