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Fitch’s Bank Rating, a Reflection of Current Economic Realities

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  • Fitch’s Bank Rating, a Reflection of Current Economic Realities

Olaseni Durojaiye, in this report, reviews the recent Fitch Ratings’ assessment of Nigerian banks and presents the perspectives that the rating mirrors the current economic realities.

Barely a month after some Nigerian banks came under the spotlight via the Moody’s rating, the sector is again back under the klieg lights as a leading global rating agency, Fitch Ratings, published its Sovereign Support Rating Floors of 19 Nigerian banks. This followed a reassessment of potential sovereign support for the lenders.

While the rating does not connote insolvency or any imminent banking industry crisis, observers and analysts however, contended that it is a pointer that the industry might be defaulting in meeting obligations to foreign investors as well as paying for maturing bills, which is an assessment of the banks’ status with respect to their abilities to attract foreign capital and meet their foreign obligations.

The cause, according to analysts is traced to the scarcity of the United States Dollar (USD) and depleted external reserves, which already constrain government from playing its supporting roles when banks face such tough times.

While the recent rating should not come as a surprise to analysts and observers of happenings in the economy, considering that financial institutions outlook in emerging markets revealed negative trends, it nevertheless reiterates the current economic challenges in the country’s economy.

The Fitch Ratings

Fitch Ratings publishes opinions on a variety of scales. The most common of these are credit rating, but the agency also publishes ratings, scores and other relative opinions relating to financial or operational strength. For example, Fitch Ratings also provides specialised ratings of servicers of residential and commercial mortgages, asset managers and funds.

Fitch Ratings’ credit rating provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, and repayment of principal, insurance claims or counterpart obligations. Credit rating is used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. The agency’s credit rating covers the global spectrum of corporate, sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by receivables or other financial assets.

The Recent Rating

In its revision of the rating of 19 Nigerian banks, Fitch Ratings downgraded the long term issuer Default Ratings of First Bank of Nigeria Limited, FBN Holdings Plc, Diamond Bank Plc, Fidelity Bank Plc, First City Monument Bank Limited and Union Bank of Nigeria Plc from ‘B’ to ‘B-‘in line with their stand-alone credit worthiness as defined by their Viability Rating.

In the same rating, the agency affirmed the long-term IDRs of Zenith Bank Plc, Guaranty Trust Bank Plc, United Bank for Africa Plc, Wema Bank Plc and Bank of Industry.

According to a statement released in London, the agency explained that, “The downgrade of nine banks’ SR and revision of 10 banks’ SRFs to ‘No Floor’ reflects Fitch’s view that senior creditors can no longer rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.

“Fitch believes that the Nigerian authorities retain a willingness to support the banks, but their ability to do so in foreign currency is weakening due to Nigeria’s eroding foreign currency/reserves, as well as limited confidence that any available foreign will not be used to execute other policy objectives. Therefore, Fitch takes the view that supports, if ever required by the banks, cannot be relied upon”.

According to Fitch, the long-term IDR of Diamond Bank Plc, Fidelity Bank Plc, FCMB and Union Bank are downgraded to ‘B-‘ as they are now underpinned by their VRs of ‘B-’ rather than their SRFs, as was previously the case.

The Fitch Ratings statement added that, “The downgrade of FBN’s long-term IDR reflects both revision of its SRF and a downgrade of its VR. The latter reflects Fitch’s view that the bank’s capital base is no longer commensurate with its risk profile, reflecting questions about asset quality, particularly its level of unreserved impaired loans to Fitch Core Capital (54 per cent as at the end of 2016) and pressure on its regulatory capital adequacy ratio.

“The VR of FBNH has also been downgraded, which drives the downgrade of its long-term IDR to ‘B-’.

Fitch also noted that it had also downgraded the national long-term ratings of Diamond Bank, Fidelity Bank, FCMB and Union Bank to ‘BBB (nga)’ from ‘BBB+’ (nga) following the rating actions on their long-term IDRs.

Analysts’ Opinions

Reacting to the rating, Executive Director, Corporate Finance, BGL Securities, Olufemi Ademola, said in an interview that the rating was not abstract but reacting to a bad situation.

According to him, “The rating is nothing abstract; it is reacting to a bad situation that the banks find themselves. It’s not surprising to discerning observers because the problem cuts across all sectors, be it oil and gas, power or sales (fast-moving consumer goods).

“With the likelihood of another round of devaluation of the naira, banks with high USD denominated loans are in trouble because what the situation translates to is that their liability has doubled. This has weakened their balance sheet. GTBank was smart to have paid off their Euro bond in advance before it matured,” he stated.

Ademola contended that lending at this time would attract higher interest due to the perceived higher risks involved adding that since there is the likelihood of another round of devaluation of the naira, the banks are weaker than they were before.

“The banks are weaker than they were before and there is the tendency of a further devaluation of the naira. Lending at this time will attract a higher interest because of the perceived higher risk involved as some will (have) high concern around ability to repay,” he submitted.

On his part, a Lagos-based analyst with a foremost economic advocacy group, Rotimi Oyelere, argued that the rating did not connote insolvency or banking industry stress but a pointer that the industry might be defaulting in meeting obligations to foreign investors as well as paying for maturing bills. He views it as an assessment of the banks’ status with respect to their abilities to attract foreign capital and meet their foreign obligations.

According to him, this is as a result of the scarcity of the greenback, depleted external reserves, which already constrain government from playing its supporting roles when banks face such tough times.

“It thus raises the question as per the quality of the assets of the banks. It appears toxic assets, non-performing loans (NPLs) and other highly risky investment are once again gathering momentum. I think the banks failed to build substantial buffers especially in assets denominated in foreign currency in the era of plenty. This would have shielded them from the current pervasive volatility. With possibility of further depreciation of the naira, the banks’ buffers may suffer further attacks.

“Another contributory factor to the asset quality generally is the number of high valued loans/facilities that have been restructured, particularly in the oil and gas sector. This is why it is important for the banks to apply appropriate metrics when pricing their risks especially in times of boom,” he said.

Speaking further, Oyelere stated that, “In times like this, the apex bank must raise its games to minimise regulatory risks, or perhaps contractions in the industry.

“Banks may explore the bonds market for raising fresh capital to finance maturing bills. Access Bank successfully raised about $350 million some months back,” he argued, adding that, “The viable bailout for the banks and even for the economy in the short term is restoration of peace in the Niger Delta region, if it will restore output to budget benchmark of 2.2 million barrel per day and then more foreign flows to the national account. If we can at least produce good quantity consistently, some of these currency depreciation risks would be averted,” he maintained.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Crude Oil Hits $71.34 After Saudi Largest Oil Facilities Were Attacked

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Brent Crude Oil Rises to $71.34 Following Missile Attack on Saudi Largest Oil Facilities

Brent crude, against which Nigerian oil is priced, jumped to $71.34 a barrel on Monday during the Asian trading session following a report that Saudi Arabia’s largest oil facilities were attacked by missiles and drones fired on Sunday by Houthi military in Yemen.

On Monday, the Saudi energy ministry said one of the world’s largest offshore oil loading facilities at Ras Tanura was attacked and a ballistic missile targeted Saudi Aramco facilities.

One of the petroleum tank areas at the Ras Tanura Port in the Eastern Region, one of the largest oil ports in the world, was attacked this morning by a drone, coming from the sea,” the ministry said in a statement released by the official Saudi Press Agency.

It also stated that shrapnel from a ballistic missile dropped near Aramco’s residential compound in Eastern Dhahran.

Such acts of sabotage do not only target the Kingdom of Saudi Arabia, but also the security and stability of energy supplies to the world, and therefore, the global economy,” a ministry spokesman said in a statement on state media.

Oil price surged because the market interpreted the occurrence as supply sabotage given Saudi is the largest OPEC producer. A decline in supply is positive for the oil industry.

However, Brent crude oil pulled back to $69.49 per barrel at 12:34 pm Nigerian time because of the $1.9 trillion stimulus packed passed in the U.S.

Market experts are projecting that the stimulus will boost the United States economy and support U.S crude oil producers in the near-term, this they expect to boost crude oil production from share and disrupt OPEC strategy.

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Crude Oil

A Loud Blast Heard in Dhahran, Saudi Arabia’s Largest Crude Oil Production Site

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Loud Blast Heard in Dhahran, Saudi Arabia’s Largest Crude Oil Production Site

Two residents from the eastern city of Dhahran, Saudi Arabia, on Sunday said they heard a loud blast, but they are yet to know the cause, according to a Reuters report.

Saudi’s Eastern province is home to the kingdom’s largest crude oil production and export facilities of Saudi Aramco.

A blast in any of the facilities in that region could hurt global oil supplies and bolster oil prices above $70 per barrel in the first half of the year.

One of the residents said the explosion took place around 8:30 pm Saudi time while the other resident claimed the time was around 8:00 pm.

However, Saudi authorities are yet to confirm or respond to the story.

 

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Crude Oil

Brent Crude Oil Approaches $70 Per Barrel on Friday

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Nigerian Oil Approaches $70 Per Barrel Following OPEC+ Production Cuts Extension

Brent crude oil, against which Nigerian oil is priced, rose to $69 on Friday at 3:55 pm Nigerian time.

Oil price jumped after OPEC and allies, known as OPEC plus, agreed to role-over crude oil production cuts to further reduce global oil supplies and artificially sustain oil price in a move experts said could stoke inflationary pressure.

Brent crude oil rose from $63.86 per barrel on Wednesday to $69 per barrel on Friday as energy investors became more optimistic about the oil outlook.

While certain experts are worried that U.S crude oil production will eventually hurt OPEC strategy once the economy fully opens, few experts are saying production in the world’s largest economy won’t hit pre-pandemic highs.

According to Vicki Hollub, the CEO of Occidental, U.S oil production may not return to pre-pandemic levels given a shift in corporates’ value.

“I do believe that most companies have committed to value growth, rather than production growth,” she said during a CNBC Evolve conversation with Brian Sullivan. “And so I do believe that that’s going to be part of the reason that oil production in the United States does not get back to 13 million barrels a day.”

Hollub believes corporate organisations will focus on optimizing present operations and facilities, rather than seeking growth at all costs. She, however, noted that oil prices rebounded faster than expected, largely due to China, India and United States’ growing consumption.

The recovery looks more V-shaped than we had originally thought it would be,” she said. Occidental previous projection had oil production recovering to pre-pandemic levels by the middle of 2022. The CEO Now believes demand will return by the end of this year or the first few months of 2022.

I do believe we’re headed for a much healthier supply and demand environment” she said.

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