Fitch Affirms Ecobank at ‘B-‘ with Stable Outlook

Fitch Ratings has affirmed Ecobank Transnational Incorporated’s (ETI) Long-Term Issuer Default Rating (IDR) at ‘B-‘ and its viability rating (VR) at ‘b-‘. The global rating agency accorded the Pan African lender outlook stable.

It said ETI ratings are driven by its standalone creditworthiness, as expressed by its VR of ‘b-‘. As a bank holding company (BHC), ETI’s viability rating is notched down once from the group VR of ‘b’.

The rating note attributed the knock down to very high common equity double leverage at 177% as of the end of the third quarter in 2023.

This takes into consideration the group’s heightened exposure to foreign-exchange (FX) risk and modest capital buffers for its risk profile, according to the rating note.

Fitch said these are balanced against a leading pan-African franchise, strong revenue and geographical diversification, acceptable asset quality, healthy operating profitability and a strong funding and liquidity profile.

It said ETI’s viability rating is one notch below the group, reflecting a higher failure risk at the BHC due to very high common equity double leverage.

The group operating conditions are negatively influenced by high sovereign debt sustainability risks across sub-Saharan Africa (SSA), the rating note said.

Nigeria and Ghana, which are two of the group’s largest markets, accounting for 29% of group’s total assets, have both been downgraded in recent years, with Ghana defaulting on local- and foreign-currency (FC) debt in 1Q23.

The rating note stated that geographical diversification mitigates sovereign risks, including high exposure to sovereigns rated ‘B-‘ and below, noting that ETI has strong Pan African franchise.

The group had banking subsidiaries spanning 33 sub-Saharan (SSA) countries and assets of USD26.6 billion at the end of third quarter of 2023, making it one of the largest banking groups on the continent outside of South Africa.

The group strong revenue diversification is supported by a broad geographical footprint and high non-interest income which printed at 43% of operating income at the end of nine months of 2023 financial year.

Meanwhile, Fitch Ratings stated that ETI is exposed to the depreciation of SSA currencies through its equity investments in subsidiaries because its reporting currency is US dollars.

Analysts said the depreciation of SSA currencies led to large foreign currency translation losses through other comprehensive income in 9M-2023 that significantly exceeded net income. This resulted in a comprehensive loss of USD236 million which was equivalent to 12% of total equity as of 2022.

But Fitch maintained that the impact of foreign currency translation losses on capitalisation is mitigated by risk-weighted assets (RWAs) deflating in dollar terms.

On the group asset quality, ETI’s impaired loans (Stage 3 loans under IFRS 9) ratio increased to 5.6% at the end of third quarter of 2023 from 5.2% in financial year 2022.

“…we expect it to increase further in 2024 due to challenging operating conditions”, Fitch Ratings said. Specific loan loss allowance coverage of impaired loans declined to 49% at the end of 3Q-2023 from 53% in FY2022.

The global rating firm said it considers exposure to sovereign debt sustainability risks due to large holdings of sovereign fixed-income securities. On profitability, EIT operating profit improved significantly to 4.6% of RWAs in 9M-2023 from 3.2% in financial year 2022, reflecting a wider net interest margin due to rising interest rates.

Fitch expects operating returns on RWAs to remain healthy in 2024. At the end of Q3-2023, it was noted that ETI’s common equity Tier 1 (CET1) ratio declined to 9.2% from 9.7% in 2022.  The contraction was due to large foreign currency translation losses, leaving only a modest buffer over its current regulatory minimum requirement (8.5%).

The rating said the ratio remains low compared with SSA peers’ and is modest for the group’s risk profile. The group remained capital-compliant in 1Q-2024 despite a weakening of the Nigerian naira and Ghanaian cedi.

ETI’s funding profile benefits from a high percentage of current and savings accounts and low depositor concentration. Fitch believes ETI will be able to leverage its strong relationships with development finance institutions and utilise group liquidity in refinancing the large amount of BHC debt maturing in 2024 and 2025.