Fitch Ratings has revised the outlook on Access Bank Plc’s Long-Term Issuer Default Rating (IDR) from Negative to Stable and confirmed the rating at ‘B.’
The rating firm disclosed this in a post on its website as it stated that risks to Access Bank’s credit profile have reduced since the commencement of the Covid-19 pandemic, as indicated in the bank’s resilient financial indicators in 2020 and 1Q21.
Access Bank’s asset quality has, however, remained stable, owing to considerable non-loan assets, including cash balances at the Central Bank of Nigeria (CBN) and government securities, regulatory forbearance on loans, and aggressive asset management at Diamond Bank.
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Following the Diamond Bank purchase, Access Bank’s funding profile has continued to benefit from its expanding retail franchise. Fitch believes there is room to raise current and savings account (CASA) share to a level more in line with peers, while funding costs could fall further as outstanding Eurobonds are refinanced at lower rates.
The bank has strong overall balance sheet liquidity, but it has significant currency swaps with the CBN, which exposed it to foreign currency liquidity risk (and counterparty risk). In view of Nigeria’s restrictive FCY circumstances, Fitch estimates that the bank’s foreign-currency liquidity to be just sufficient, notwithstanding possible liquidity from the border Access Bank group. Large cash placements (excluding limited deposits at the CBN) and government securities enhance naira liquidity for the bank.
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What Fitch is saying about the upgrade
According to Fitch, without a major improvement in the operational environment and a sovereign upgrade, as well as additional improvement in the bank’s underlying asset quality and a strengthening of its capitalization to a level more in line with large bank peers, improvement to Access’s ratings may be improbable.
It said, “The bank’s asset quality has continued to hold up, supported by substantial non-loan assets – largely comprising cash balances at the Central Bank of Nigeria (CBN) (mainly restricted deposits) and government securities – regulatory forbearance on loans, and proactive management of legacy assets at Diamond Bank (acquired 2019).
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Access Bank’s operating profit to risk-weighted assets (RWA) is sound (end-1Q21: 6.1%, up from 3.3 % at end-2020), and has been supported by lower funding costs (reflecting expanding CASA deposits in 2020), increased scale following the Diamond acquisition, and higher oil prices. Non-interest revenue should continue to grow, driven by customer-driven trading income and fee income as economic activity picks up.
The bank has good overall balance sheet liquidity but takes foreign currency liquidity risk (and counterparty risk) through substantial currency swaps with the CBN. We consider foreign-currency liquidity to be only adequate, notwithstanding potential liquidity available from the broader Access Bank group, in light of the tight FCY conditions in Nigeria.
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Access’s National Ratings reflect its creditworthiness relative to other issuers in Nigeria. They are lower than the highest-rated Nigerian peers due to Access’s weaker profitability and capitalisation metrics. Access’s National Short-Term Rating of ‘F1(nga)’ is the lower of the two possible options for the bank’s ‘A+(nga)’ National Long-Term Rating under Fitch’s criteria, reflecting potential risks to funding and liquidity from market instability.”
Fitch, however, noted that the ratings might also be lowered if Access’ FCC ratio remains below 15% for a protracted time, asset quality deteriorates considerably – to the point that its impaired-loan ratio climbs over 10% – or there is a major tightening in the bank’s foreign-currency liquidity.
What this means
- Fitch raised Access Bank’s credit rating from B- to B, indicating that the bank’s resilience is improving.
- Lower funding costs, expanded scale following the Diamond acquisition, and higher oil prices have all contributed to Access’ operating profit to risk-weighted assets (RWA). Non-interest revenues are expected to continue to increase as customer-driven trade and fee revenues increase.
- Despite this, profitability falls short of the highest-rated peers in Nigeria, owing in part to Diamond Bank integration costs.
- Loan-impairment charges are expected to continue high in 2021, albeit they will be lower than in 2020, when Access disclosed a one-time penalty at its UK subsidiary.