S&P: Nigeria-Based Stanbic IBTC Bank 'B+/B' And 'ngA-/ngA-2' Ratings Affirmed; Outlook Negative
We also affirmed our 'ngA-/ngA-2' long - and short-term Nigeria national scale ratings on the bank.
The affirmation reflects that although we anticipate that Stanbic IBTC Group'sasset quality will weaken, due to a downturn in the Nigerian economy, we believe Stanbic IBTC will withstand economic shocks, thanks to its level of capitalization and parental support from the Standard Bank group, and maintaincredit metrics commensurate with the current rating.
Our ratings on Stanbic IBTC reflect the creditworthiness of the entire StanbicIBTC Group, because we consider the bank to be the core component of the group. In addition, we consider Stanbic IBTC to be strategically important to South Africa's Standard Bank Group (SBG) Ltd., and we therefore factor in one notch of group support above the stand-alone or unsupported group credit profile (GCP) of Stanbic IBTC, which we assess at 'b'.
We believe Stanbic IBTC benefits from strategic and potentially from extraordinary capital, as well as risk-transfer and liquidity support from SBGin case of need. However, the ratings on Stanbic IBTC are capped by our foreign currency sovereign credit ratings on Nigeria (foreign and local currency B+/Negative/B). We do not rate Nigerian banks above the foreign currency sovereign credit ratings, because of the likely direct and indirect influence of sovereign distress on their operations, including their ability to service foreign currency obligations.
We assess Stanbic IBTC's ratings in the context of a constrained operating environment in Nigeria; underscored by oil production and price shocks, contracting economic growth, limited access to foreign currency, and naira depreciation risks.
We expect Stanbic IBTC will report weaker earnings in 2016, due to fewer profitable lending opportunities along with rising credit and funding costs.
Despite the negative pressure on earnings capacity over the next 12-18 months, we think the bank will maintain ample capital buffers above its regulatory minimum of 10%. For year-end 2015, we estimate the bank will report a total capital adequacy ratio (CAR) between 18% and 19% and a Tier 1 CAR of 14%-15%; while reporting ratios for the consolidated group of approximately 21%-22% and17%-18%, respectively. We anticipate similar ratios for the next 12 months, while the bank balances the subdued pace of internal capital generation with faster growth in risk-weighted assets, owing to the revaluation of foreign-currency denominated assets after the naira's steep depreciation when the exchange rate was liberalized in June 2016. As such, over the next 12 months, we project our own risk-adjusted capital (RAC) ratio for the bank willremain at similar levels we estimate as of year-end 2015, at 6.1%.
Furthermore, as of Sept. 30, 2015, Stanbic IBTC group reported a sharp deterioration in asset quality, especially among its oil and gas and transportsector loans. Its nonperforming loan (NPL) ratio climbed to 7.4% in the first nine months of 2015 from 4.3% at year-end 2014 and its cost of risk to 4% from0.9% over the same period. We expect asset quality will be pressured over the next 12 months, with elevated NPLs between 6% and 7% and a cost of risk at 3%-4%, which is in line with our expectations for the sector, on average. These metrics are a consequence of high single-obligor concentrations in the banking book, with Stanbic IBTC's top-20 loans estimated at about 45% of totalloans over the next 12 months and its top-20 NPLs expected to account for morethan 80% of total NPLs over the same period. We think its foreign currency loans and sectoral concentrations are moderate and comparable to those of top-tier peers'. Positively, the bank generally maintains good loan loss reserve coverage of NPLs, which we expect will climb to more than 100% in the next 12 months.
The group also has a pending court case with Nigeria's Financial Reporting Council over alleged irregularities in its historical reporting of certain transactions with affiliates. The timing and costs associated with resolving the case are difficult to ascertain; but we are of the opinion that it is unlikely to have any material impact on the bank's ratings. We also understandthat the bank's financial results for year-end 2015 and subsequent interim reports will be withheld until the legal case is resolved.
Our ratings also consider the bank's modest market position in traditional retail and business banking, where it operates at a scale disadvantage compared with its peers. We expect its retail franchise will remain a loss-making division in 2016, although it forms the central part of the bank'slong-term strategy to pivot its business model toward a retail-led bank with alow-cost retail deposits and a stable transactional revenue base. At present, Stanbic IBTC's business stability largely depends on its market-leading position in wealth management and its investment-banking platform--both of which drive its revenue-generation capacity and profitability, but are inherently market-sensitive and potentially volatile sources of income.
Its funding base depends on high-cost corporate and institutional term deposits, which, in our opinion, are a more volatile source of funding in a market downturn than traditional retail deposits. We think this constrains Stanbic IBTC's ability to compete adequately with its top-tier peers, althoughthe bank relies on its brand reputation and the expertise within the broader SBG to support its corporate and investment banking relationships. Positively, the bank maintains a liquid balance sheet and its foreign currency liquidity management is better than some of its peers'. We understand that over the past12 months, the bank has significantly reduced its net open position in the banking book and benefits from backup committed liquidity lines from its parent in case of need.
The negative outlook on Stanbic IBTC primarily reflects that on Nigeria.
We therefore do not see any upside to the ratings in the next 12 months. We would revise the outlook on the bank to stable in the next 12 months if we took a similar action on Nigeria.
We could lower the ratings in the next 12 months if we were to downgrade Nigeria or if we believed that SBG's support for Stanbic IBTC had diminished, all other factors remaining unchanged.
Additionally, we could revise downward our assessment of Stanbic IBTC’s unsupported GCP, if its asset quality deteriorated more than peers' within thenext 12 months, with its cost of risk and NPLs materially above our expectations for the sector averages of about 3% and 6%, respectively. The unsupported GCP could come under pressure if the bank's retail banking strategy failed to yield a profitable franchise within the next 12 months or if its exposure to market-sensitive income materialized in significantly weaker profitability metrics than we currently expect. Neither scenario would result in a downgrade, though, due to the parental group support we incorporate into the ratings.