Following the downgrade of Nigeria’s sovereign rating recently by Moody’s Investor Service (Moody’s), the service has downgraded the long-term deposit ratings of Nigerian banks to Caa1 from B3, but the change in outlook to stable.
The downgrade affects the long-term deposit ratings, issuer ratings as well as the senior unsecured debt ratings (where applicable), of all the Moody’s rated banks in Nigeria: Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Limited, Union Bank of Nigeria plc, Fidelity Bank plc, FCMB (First City Monument Bank) Limited and Sterling Bank Plc.
At the same time, Moody’s has changed the outlook to stable on the long-term deposit ratings, issuer ratings as well as senior unsecured debt ratings (where applicable) of the nine rated Nigerian banks.
- This latest rating follows Moody’s downgrade on 27 January 2023 of the long-term issuer rating of the Government of Nigeria to Caa1 from B3 and a change in the outlook to stable.
- This action concludes the review initiated on 13 October 2022 and extended on 25 October 2022.
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What this means
Moody’s rating downgrade for Nigerian bank’s long-term deposits suggests the rating agency is concerned about their exposure to Nigeria’s sovereign debts which it also downgraded last week.
- “Rated Nigerian banks have significant direct and indirect exposure to the Nigerian sovereign, with a significant portion of their assets located in the country, and sovereign debt holdings representing 28% of their aggregate total assets as of June 2022.”
- “Government exposure links the banks’ credit profiles with the sovereign’s, whose rating was downgraded on 27 January 2023, to reflect Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate.”
- “Government exposure links the banks’ credit profiles with the sovereign’s, whose rating was downgraded on 27 January 2023, to reflect Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate.”
Since most bank deposits are invested in government debts and the state of the debt is deteriorating, it then means the deposits could be in danger of being impaired.
- This, however, is not a statement intended to suggest the deposits themselves are impaired, rather they are highlighting a possible risk, albeit remote.
Challenging Operating Environment
Reflection of weakening operating environment: Moody’s downgrade of the long-term ratings of nine Nigerian banks reflects a combination of (a) the weakening operating environment, as captured by Moody’s lowering of its Macro Profile for Nigeria to “Very Weak” from “Very Weak+”; and (b) the interlinkages between the sovereign’s weakened creditworthiness (as indicated by the downgrade of the sovereign rating to Caa1 from B3) and the banks’ balance sheets, given the banks’ significant holdings of sovereign debt securities.
- The revised macro profile for Nigeria reflects Moody’s expectation that depressed and uncertain oil production, capital outflows amid a flight to quality, and the government have constrained access to external funding will likely continue to weigh on Nigeria’s external position in 2023.
- The government faces wide-ranging fiscal pressure while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and social challenges.
Stable outlooks reflect on the sovereign rating: The stable outlooks on the long-term deposit, issuer and senior unsecured debt ratings (where applicable) of the Nigerian banks are in line with the stable outlook of Nigeria’s government rating.
- The stable outlook on the sovereign rating reflects the fact that, while a new administration could reinvigorate the reform impetus in Nigeria after the general elections planned for 25 February 2023 and thereby support fiscal consolidation, implementation will likely remain lengthy amid marked social and institutional constraints.
- According to Moody, the government has long-held the aim of raising non-oil revenue and phasing out the costly oil subsidy, but these objectives necessitate reforms that are institutionally, socially, and politically challenging to carry through. Meanwhile, funding conditions are likely to remain tight.
