……long-term issuer default rating at ‘B’ and viability rating at ‘b’ with a stable outlook
Despite poor financial performance Guaranty Trust Bank Limited’s (GTB) in the period under review, Fitch Ratings has affirmed the bank with long-term issuer default rating at ‘B’ and viability rating at ‘b’ with a stable outlook, the agency said in a new report.
According to the ratings, the bank’s stable outlook reflects Fitch’s view that risks to GTB’s credit profile are captured at the current rating level, with sufficient headroom, under its base case, to absorb the fallout from operating- environment pressures.
“The ratings of GTB are driven by its intrinsic creditworthiness, as defined by its ‘b’ viability ratings”, it added.
It explained that the bank’s viability rating takes into consideration its business concentration and sensitivity to Nigeria’s volatile operating environment, which is mitigated by solid capitalisation, healthy asset quality, solid through-the-cycle profitability and a deposit-driven funding profile.
GTB is the fifth-largest banking group in Nigeria by asset at end of the first half of 2021. Its loan book forms a small proportion of total assets at 33% as of the first half of 2021 but is concentrated by borrowers and sectors.
The report also noted that GTB’s impaired (stage 3 under IFRS 9) loan ratio fell to 6% at end of the period from 6.4% at end of the financial year 2020, attributed to a big-ticket write-off.
“We expect only modest asset-quality deterioration over the next 18 months, notwithstanding its material oil and gas exposure and significant Stage 2 loans, given higher oil prices and sound collateralization”.
The ratings spotted that Oil and gas loans formed 43% of the loan book at the end of the first half of the year and were mainly to the upstream sector.
However, Fitch said this book performed well in 2020, partly reflecting higher-than-expected oil prices and financial hedges taken out by borrowers to reduce the risk of lower oil prices.
Nevertheless, Fitch analysts reiterated the belief that a prolonged period of lower prices would put heightened stress on borrowers and on GTB’s asset quality – although this is not our base case.
It said stage 2 loans were a significant 16% of gross loans end of the first half of 2021 and largely comprised lumpy restructured loans -18% of gross loans in total- concentrated in the oil and gas sector.
“Reserves coverage of Stage 2 loans was 7%”.
The bank’s profitability is a rating strength and remains robust, despite weakening in the first half of the year, due to lower yields on securities – though it accounted for 23% of total assets- and competition for corporate customers, as a result of which lending margins contracted in the period.
Interestingly, Fitch recognised that the bank’s profitability is underpinned by wide margins and consistently low loan impairment charges.
Non-interest income, mainly from fees, rose in the first half and should continue to relieve some pressure on earnings, as should group diversification initiatives from cross-selling via the holding company, Guaranty Trust Holding Co.
GTB’s Fitch Core Capital of 26% in the first half is at the higher end among peers’ and the bank’s capital adequacy ratio (24%) provides a solid buffer over regulatory requirements. The bank tangible leverage ratio which printed at a high 15.5% also outperforms peers’.
Fitch said the bank’s capitalisation is supported by high pre-impairment profit, which provides a solid buffer to absorb losses through the income statement.
Nevertheless, the ratings cap a caveat, saying that the lender’s capitalisation remains sensitive to naira devaluation due to GTB’s dollarised balance sheet, borrower concentration and a high amount of stage 2 loans.
At the end of the first half, foreign-currency loans accounted for 53% of the bank’s gross advances to customers. Furthermore, it said while its Nigerian sovereign securities exposure is significantly below peers’, it is high relative to the bank’s equity.
Again, Fitch recognises that the bank is predominantly deposit-funded, adding that the funding mix continues to benefit from a large base of low-cost current and savings accounts, which formed 87% of total deposits at end of the first half of 2021.
Amidst a low appetite for lending, Fitch said lender’s loans to deposits ratio was 47% at the end of the first half of the year, and it expects funding costs to start to rise as customer demand for T-bills and term deposits increases, in line with a recent uptick in yields.
“Naira liquidity is ample, supported by large cash placements at the Central Bank of Nigeria and, predominantly, Nigerian government securities”.
It added that the bank’s foreign currency liquidity is adequate despite the scarcity in the Nigerian economy.
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