Fitch Ratings, one of the biggest rating agencies in the world, recently rated Zenith and Guaranty Trust Bank (GTB) highest in Nigeria despite downgrading the rating of the financial institutions and two others from “stable” to “negative.”
The recent Fitch ratings which downgraded some Nigerian banks from stable to negative due to what the ratings agency termed heightened vulnerability of capital due to downside asset quality risks has been described as a reflection of the economy.
The other affected banks are First Bank of Nigeria (FBN) and Diamond bank. Fitch also affirmed the Long-Term Issuer Default Ratings (IDR) of 10 financial institutions in Nigeria.
The financial institutions whose IDR’s were affirmed by Fitch are United Bank for Africa (UBA), Access Bank, Fidelity Bank, Union Bank, First City Monument Bank (FCMB), and Wema Bank. The national ratings of Stanbic IBTC Bank, as well as its bank holding company, Stanbic IBTC Holdings Plc, were also affirmed by the rating agency.
The banking sector lubricates the nation’s economy and any sign of systemic risk, portends danger signal for the entire economy. Some of the expected consequences, experts say, include anticipated negative reaction of the equities market, further regression of the economy, threat to job security and depressed Human Development Index (HDI), among others.
Afrinvest West Africa Limited CEO, Mr. Ike Chioke, recently stated that banks are boosting earnings via foreign exchange earnings as against core banking operations. He added that most of the banks have negative retained earnings.
Chioke described the expected results of banks as expected to spring surprises, predicting that even some top-tier surprises will report higher none performing loans exceeding the regulatory threshold which also reflects danger signal. “As at last October 2016, we were seeing NPL in the industry at about 11 percent, while the regulatory limit in the industry is 5 per cent”
“The high none performing loans” Chioke said, gives cause for worry “ That, somewhat gives cause for concern and one beginning to wonder if the CBN will begin to do another AMCON backed restructuring”
A cross sections of experts have said that the rating was coming at the time some of the banks were yet to release their 2016 financial results and likely may serve as a window on what to find in the expected results.
According to them, the downgrading rating was expected, hence the sovereign ranking of the country was also downgraded. The experts maintained that no organization would rank higher than its sovereign rating, unless on very few cases.
A Lagos based stock broker, Mr. Paul Uzum, said “it is expected, the banks are products of the country they operate in and therefore should not be expected to have positive ranking, while their country maintains negative ranking, and hence they are products of the same macro and micro economic environment.
In his view, Matthew Ogagavworia, a senior stockbroker and chartered accountant said that “It is a wrong signal for the Nigerian economy. It will hurt foreign direct investment and also foreign portfolio investments. The stocks of those banks are likely to feel the heat rather earlier”
According to him, the Fitch report says 2016 profits of most banks were padded with foreign currency gains and revaluations rather than from core banking and that most of the banks are holding huge chunks of federal government bonds and hence the sovereign rating has been downgraded, it certainly will affect their instruments and institutions.
He said that that ranking reflects that the banks ratings cannot be higher than that of the country they are operating in. he said that a negative rating for an otherwise big Nigerian Bank has consequences for the smaller banks, as it can affect the ability of the big one to access credit from lenders, it also means that attracting funds by smaller banks may also face some challenges.
According to the financial expert, the confirmation of United Bank for Africa (UBA), Access Bank, Fidelity Bank, Union Bank, First City Monument Bank (FCMB), Wema Bank, could affect the overall outlook of foreign investors in the Nigerian landscape.
“The operating environment continues to be affected by the oil price shock, slow GDP growth, continuing pressure on the naira, scarcity of hard currency in the FX interbank market and policy uncertainty,” he said.
The impact of the Fitch downgrading, he said would begin to unfold when investor become wary that the economy cannot support new businesses as credit worthiness of some of the otherwise big banks, investments will be constrained.
Consequently, emergence of new jobs will also slow down, incomes may also suffer and hence a slowdown in economic recovery with a delayed recovery cycles.
On way out of the doom, he called on the government confront the macro/micro economic headwinds to enhance growth in the Gross Domestic Product (GDP).
He said that with clear fiscal & monetary policies, the economy would position for sustained growth and when banks rebalance their assets, they would begin to reap from the renewed economic vibrancy to generate enhanced rating.