Africa: Moody’s Affirms Ecobank Ratings with Negative Outlook

Moody’s has today affirmed Ecobank Transnational Incorporated (ETI) ratings as the outlook shifted to negative from stable after downsides associated with the Pan-African lender’s key markets – Nigeria and Ghana.

In the rating note, Moody’s kept ETI’s long-term issuer ratings of B3, the Not Prime short-term issuer ratings, the B3 senior unsecured foreign currency rating.

It said the change in outlook to negative on the long-term issuer and senior unsecured debt ratings captures the weaker sovereign creditworthiness, deteriorating macroeconomic environment and increasingly uncertain operating environment in Ghana and Nigeria.

It said the two countries are the major jurisdictions where ETI operates.

The rating note indicates that Moody’s affirmation of ETI’s b2 notional BCA takes into consideration the gradual improvement and resilience in the asset quality, capitalisation and liquidity of the consolidated subsidiaries of ETI over the last couple of years.

As a counterbalance to the aforementioned improvement, the rating affirmation also takes into account the group’s still weak capitalisation, legacy problem loans, as well as profitability challenges at the Nigerian operations.

It stated that ETI’s problem loans improved to 6.3% of gross loans as of September 2022 from 9.7% as of December 2019, while loan loss reserves increased to 113% of problem loans as of September 2022 from 58% as of December 2019.

Moody’s has recently downgraded the government issuer ratings of these two countries – to Ca from Caa2 for the Government of Ghana and to Caa1 from B3 for the Government of Nigeria – and lowered the respective Banking System Macro Profile scores to “Very Weak-” and to “Very Weak”.

It said weaker creditworthiness of the Ghanaian and Nigerian sovereigns poses material risks to ETI’s credit profile.  This is so given the interlinkages between the sovereigns’ credit profiles and the group’s balance sheet, through ETI’s significant holdings of sovereign debt securities and other assets in these two jurisdictions.

According to Moody’s, ETI has significant exposure to Ghana and Nigeria, with 24% of its assets located in Nigeria and 9.9% of its assets located in Ghana as at 30 September 2022.

In Ghana, although the terms of the restructuring remain uncertain, Moody’s expects that private creditors will likely incur substantial losses in the restructuring of local and foreign currencies debts issued by the Government.

It noted that a restructuring of sovereign debt securities would also weaken the banking system’s liquidity in the country, especially if maturities are extended, because banks will need to hold on to their government exposure for an extended period, limiting their ability to lend to the real economy.

Nevertheless Moody’s expects that the banking sector will receive a degree of support in the form of forbearance from domestic authorities.

In Nigeria, Moody’s expects the government’s fiscal and debt position to continue to deteriorate. The government faces wide-ranging fiscal pressure while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and social challenges.

For Ghana, Moody’s lowered its Macro Profile to ‘Very Weak -‘ from ‘Very Weak’. The likely government debt restructuring and further deterioration in macroeconomic conditions have increased the risks on Ghanaian banks’ solvency and liquidity profiles.

For Nigeria, Moody’s lowered its Macro Profile for Nigeria to “Very Weak” from “Very Weak+”.

“The revised Macro Profile for Nigeria reflects Moody’s expectation that depressed and uncertain oil production, capital outflows amid flight to quality and the government’s constrained access to external funding will likely continue to weigh on Nigeria’s external position in 2023.

“The revised Macro Profile also captures the risks that foreign currency shortages in the country pose to the liquidity, capitalisation and asset quality of Nigerian banks”.

Also, it explained that the negative outlook also captures the relatively modest foreign currency liquidity position of the holding company amid tight funding conditions globally, as well as the expected decline in dividends upstreamed by the Ghanaian subsidiary, citing lower profitability and a weaker local currency.

Moody’s stated that the risk is partly mitigated by ETI’s track record of raising cross-border funding, the expected increase in dividends upstreamed by the subsidiaries operating in the Central African Economic and Monetary Community.

The mitigated risk outlook is also supported by the West African Economic and Monetary Union as well as the group’s ability to temporarily upstream liquidity from its subsidiaries on a contingent basis.