Moody's places long-term ratings of nine Nigerian banks on watch for downgrade

Moody's Investors Service has placed the long-term deposit ratings, as well as the long-term issuer ratings and senior unsecured debt ratings, if any, of the nine banks on review for downgrade. following Nigerian songs.

The banks are Access Bank, Zenith Bank, First Bank, United Bank for Africa Plc, Guaranty Trust Bank Limited, Union Bank of Nigeria, Fidelity Bank, First City Monument Bank and Sterling Bank Plc.

The rating agency said its decision to subject banks' long-term ratings to a downgrade reflects the risk of increased currency rationing that could undermine banks' operational ability to meet their foreign currency obligations, as well as the risk arising from a possible significant depreciation of the country's exchange rate on the capitalization and quality of banks' assets.

"Constraints on domestic oil production, capital outflows and the rising cost of refined petroleum products imported from the country, coupled with the strengthening US dollar, have together weighed on the availability of foreign currency liquidity in the country despite rising oil and material prices discrepancies between official and parallel market exchange rates persist in the country,” he said in a statement on Thursday.

"Nigeria's foreign exchange reserves fell to $38 billion in September 2022 from $40 billion in January 2022, despite rising oil prices, and we understand that the central bank, which is the main country's foreign exchange provider, has consequently reduced and become increasingly selective with its foreign currency allocations.”

The examination of the downgrades of banks' long-term ratings also takes into account the risk that a possible significant depreciation of the country's exchange rate could pose to banks' capitalization and asset quality.

On average, about 40% of loans made by Nigerian banks rated by Moody's in December 2021 were denominated in foreign currencies, mostly in dollars. Some of these borrowers are vulnerable to further naira depreciation because they do not earn foreign exchange income, and a weaker naira would hurt their ability to repay. The relatively high level of bank dollarization also limits the ability of the central bank to act as a lender of last resort in times of need.

Moody's rating said its review will focus on assessing banks' operational ability to meet their foreign currency obligations. The rating review will take into account the expected evolution of foreign exchange reserves, as well as the various tools available to banks to make payments in foreign currencies in a context of reduced availability of US dollars. Moody's rating review will also assess the resilience of banks' foreign currency liquidity positions and risk management frameworks amid continued currency rationing in Nigeria and tighter funding conditions globally.

The Moody's rating review will also assess the resilience of banks' balance sheets to a possible significant depreciation of the country's exchange rate. In particular, the rating agency's review will assess the extent to which banks' capitalization buffers and currency positions mitigate the risk of a potential significant weakening of the local currency.

Downside pressure on ratings could materialize if the review concludes (a) that the limited availability of foreign currency in the country is likely to impair banks' ability to operationally meet their foreign currency obligations , and/or (b) that the banks' balance sheets do not have the necessary resilience to resist a possible significant depreciation of the local currency. The above challenges could be addressed by lowering Nigeria's macro banking profile.

Upside pressure on ratings is limited given the current downgrade review. Confirmation of current ratings at the end of the review period could result from an assessment that (a) banks have the operational capacity to continue to meet their foreign currency obligations should foreign currency liquidity shortages materialize continue for an extended period of time, and (b) their balance sheets are sufficiently resilient to withstand a possible significant depreciation of the local currency in the context of a potential convergence of official and parallel foreign markets...