Fitch Ratings has dropped the ratings of (three of the Tier 1 banks in Nigeria) Zenith Bank, Guaranty Trust Bank, and United Bank for Africa to Long-Term Issuer Default Rating (IDR) ‘B’ and Viability Rating (VR) ‘b’.
The rating also placed the Long-Term IDRs, VRs and National Ratings of all 10 rated Nigerian banks (excluding Stanbic IBTC Holdings – SIBTCH and Stanbic IBTC Bank – SIBT, which are not assigned VRs and IDRs) on Rating Watch Negative (RWN).
What it means: RWN reflects Fitch’s expectations that all Nigerian banks will face material pressures from a weaker operating environment over the next few months given the oil price crash, potential further devaluation of the Nigerian naira and the impact of the COVID-19 pandemic on individuals and businesses.
It stated, “While the full extent is not yet known, it is our view that ‘b+’ VRs and ‘B+’ IDRs are no longer compatible with the deteriorated operating environment.”
It is important to note that before the current crisis, Fitch’s sector outlook for the Nigerian banking sector was negative, which reflected tough operating conditions, including slow GDP growth, rising regulatory risks and potential performance pressures.
According to the rating, Nigerian banks’ credit profiles are expected to suffer from weaker asset quality and reduced profitability in the more severe downside scenario.
[READ MORE: Fitch to downgrade Nigeria’s credit rating if …)
According to Fitch, the current oil price shock would adversely impact the oil and gas sector. “This sector accounts for around 30% of the banking sector’ gross loans, of which a large proportion was restructured during the previous crisis (some are still classified as Stage 2 under IFRS 9).
“Our stress tests show that asset-quality risks arising from deterioration of the banks’ oil and gas exposures are the biggest threat to their ratings. Additionally, we expect the non-oil segment to be impacted by the slower economy, but also due to the COVID-19 crisis, which could severely affect communities and industries. It would particularly test the quality of consumer and SME loans.”
Lower oil revenues also raise the prospect of a material naira devaluation, which would put pressure on the banks’ regulatory capital ratios.
However, given the banks’ net long foreign-currency positions, Fitch’s stress tests show that in most cases the impact on Fitch Core Capital (FCC) ratios is tolerable under several scenarios.
“Nigerian banks have reasonable loss-absorption buffers, underpinned by strengthened capitalisation since the last crisis. In the near term healthy earnings will continue to absorb larger credit losses but future profits will be under pressure from slowing loan growth,” it added.
Other effects are reduced client activity and higher levels of provisioning for expected credit losses under the IFRS 9 accounting framework.
On balance, the near-term impact from the oil price shock and COVID-19 on funding and liquidity is likely to be tolerable. The primary risk is that lower oil revenues (and Nigeria’s falling FX reserves) could limit banks’ access to foreign currency (FC) liquidity.
Furthermore, adverse global conditions could impede some banks in raising external financing. Local-currency liquidity remains strong with banks funded mainly by low-cost customer deposits.
Meanwhile, Central Bank of Nigeria (CBN) had announced relief measures, which should alleviate some near-term asset-quality pressures. These include requesting banks to restructure loan tenors and terms for consumers and business that are most affected, particularly borrowers in the oil and gas, agriculture and manufacturing sectors.
Fitch will resolve the RWN once it has assessed how this economic shock impacts the banking system and the credit profiles of each bank, as well as the banks’ ability to adapt. Fitch expects to resolve the RWNs in the next six months.
[READ ALSO: How the latest Fitch report affects you in 2020)
Key rating drivers
IDRs and VRs: The Long and Short-term IDRs of Nigerian banks are driven by their standalone credit profiles as determined by their VRs. Long-Term IDRs range from ‘B’ to ‘B-‘, reflecting Nigeria’s challenging and volatile operating environment, which highly influences the banks’ financial and non-financial rating factors.
Asset-quality metrics, which have improved over the last three years owing to restructuring, recoveries and write-offs, are likely to deteriorate in 2020 due to the current shocks. This will also put increasing pressure on earnings, profitability and capitalisation. The risks to funding and liquidity are mainly from disruption in FC liquidity.
Support ratings and support rating floor: Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s (B+/Negative) weak ability to provide support, particularly in FC.
Therefore, the Support Rating Floor (SRF) of all Nigerian banks is ‘No Floor’ and all Support Ratings (SRs) are ‘5’. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.
Nationa ratings: The National Ratings reflect the creditworthiness of the Nigerian banks relative to other issuers in Nigeria. The National Ratings of SIBTCH and SIBTC are the highest in Nigeria, reflecting our view of potential support from parent Standard Bank Group (BB+/Negative) if required. The RWN on the 10 other commercial banks’ National Ratings reflect our view that their standalone credit profiles are weakening in the current downturn.
Paypal’s Venmo now permits cryptocurrency trading
Venmo will support four different cryptocurrencies: Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
Venmo, a mobile payment service owned by PayPal has announced that it has started allowing users to buy, hold and sell cryptocurrencies on its app. Just like PayPal, Venmo will support four different cryptocurrencies: Bitcoin, Ethereum, Bitcoin Cash, and Litecoin, and users can carry out transactions with as little as $1 on the app
Founded in 2009, Venmo has over 70 million users and it is one of the most popular payment channels in the US. The payment platform processed around $159 billion in payments last year.
Since the app functions like a social network, adding cryptocurrency will offer a more user-friendly feel for people who love buying and selling crypto.
As bigger companies show more interest in cryptocurrency, there will be wider adoption of virtual currencies in future. Venmo is the latest payment app that is offering support for cryptocurrency on its platform.
Paypal, the parent company of Venmo is one of the most active companies in the crypto space as it allows users to buy, sell and hold cryptocurrencies in their digital wallets. Paypal users can also spend their coins at millions of merchants globally.
Crypto on Venmo is enabled through PayPal’s partnership with Paxos Trust Company, a regulated provider of cryptocurrency products and services.
What they are saying
Darrell Esch, Venmo’s Senior Vice President and general manager said “Our goal is to provide our customers with an easy-to-use platform that simplifies the process of buying and selling cryptocurrencies and demystifies some of the common questions and misconceptions that consumers may have.”
ABCON asks CBN to check impact of cryptocurrencies on diaspora remittances
The association also noted that the apex bank needs to address other issues driving the patronage of cryptocurrency exchanges for remittance transfers.
The Association of Bureau De Change Operators of Nigeria (ABCON) has asked the Central Bank of Nigeria (CBN) to introduce measures that will neutralize the positive effects of cryptocurrencies as a channel for diaspora remittances.
This is to redirect diaspora remittances away from cryptocurrency exchanges to official channels and also protect such against potential disruptions.
This call was made by ABCON during its Quarterly Economic Review for the first quarter of 2021 where it commended the CBN for the N5/$ rebate scheme introduced to encourage diaspora Nigerians to use official channels to remit their funds.
However, the association noted that the apex bank needs to address other issues driving the patronage of cryptocurrency exchanges for remittance transfers.
What ABCON is saying in their statement
The association in its statement said, “It is noteworthy that public acceptability for cryptocurrency exchanges are rising which could be quite accountable for the wide drop in diaspora inflows to Nigeria. Insecurity in the country is giving it greater prominence as investors and citizens are finding Cryptocurrency a safe haven for their wealth in case of any eventuality.
In most Emerging Markets Bitcoin transfers surged last year, as the pandemic exposed the cheaper and more efficient digital remittance services. Migrants sending money across borders to their families prefer the minimal transaction costs of cryptocurrency exchanges against the exorbitant costs of traditional money transfer companies like Western Union.”
According to ABCON, “Cryptocurrency transactions are faster than the conventional transfers, which require passing through banks reliant SWIFT, the sluggish, half-century-old interbank messaging system that handles cross-border payments.
These exchanges override the political complications of official channels. The global reach of cryptocurrencies avoids the inflation risk inherent to official currencies, especially in politically unstable countries reliant on fickle foreign investors.
Thus, while we commend the efforts of CBN in introducing the package of Five Naira for One Dollar transfer, it can be seen from the analysis above that the challenges exceed just non-payment of foreign currency by the IMTCs and the exchange rate. Strategies that satisfy the most sensitive of these advantages of Cryptocurrency exchanges must be introduced to redirect flows to the official channel.”
ABCON also expressed concerns over the country’s huge unemployment rate, urging the government to apply radical approaches with the use of both conventional and unconventional economic and political tools to redress the trend.
What you should know
- It can be recalled that the apex bank had about 2 months ago, warned the Deposit Money Banks, Non-Financial Institutions and other Financial Institutions against doing business in crypto and other digital assets.
- The CBN directed financial institutions to immediately close the accounts of persons or entities transacting in or operating cryptocurrency exchanges, warning of severe regulatory sanctions in the event of any breach of the directive.
- The Securities and Exchange Commission (SEC) had a few days ago, revealed that it is working with the CBN for a better understanding and regulation of cryptocurrencies in the country.
Nairametrics | Company Earnings
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