Tuesday, October05, 2021 / 07:16 PM / by Fitch Ratings / Header Image Credit: FinTech Magazine

Fitch Ratings has affirmed SterlingBank Plc's Long-Term Issuer Default Rating (IDR) at 'B-' with a StableOutlook. The National Long-Term Rating has been upgraded to 'BBB+(nga)' from'BBB(nga)', reflecting the bank's increased creditworthiness relative to thatof other issuers in Nigeria.

Key Rating Drivers

Issuer Default Ratings and ViabilityRating

The IDRs of Sterling are driven by its standalonecreditworthiness, as expressed by its Viability Rating (VR) of 'b-'. The VRreflects the concentration of the bank's activities within Nigeria'schallenging operating environment, a fairly small franchise, high creditconcentrations, and foreign currency (FC) funding and liquidity weaknessesresulting from high depositor concentration. This is balanced against adequateasset quality and capitalisation for the bank's risk profile.

The Stable Outlook reflects Fitch's view that risks toSterling's credit profile are captured by the current rating, with sufficientheadroom under our base case to absorb the fallout from operating-environmentpressures.

Operating conditions in Nigeria are graduallystabilising. Fitch forecasts 1.9% GDP growth in 2021, following a 1.8%contraction in 2020. Our baseline scenario is that business volumes andearnings should continue to rebound in 2021, while the rally in oil prices isalso a positive factor. Nevertheless, downside risks linger, given inherentlyvolatile market conditions, with banks still exposed to FC shortages, potentialfurther currency devaluation, rising inflation and regulatory intervention bythe Central Bank of Nigeria (CBN).

Sterling has a fairly small franchise, representing 3%of domestic banking-system assets at end-2020. Single-borrower concentration ishigh, with the 20-largest customer loans representing 53% of gross loans or286% of Fitch Core Capital (FCC) at end-1H21. Its oil and gas exposure hasreduced in recent years but remains material, representing 26% of gross loansor 139% of FCC at end-1H21, and is concentrated in the upstream and servicessegments, posing a significant risk to asset quality in the event of aprolonged period of low oil prices and production cuts.

Sterling's impaired loans (Stage 3 loans under IFRS 9)ratio increased to 2.9% at end-3Q20 from 2.2% at end-2019, as a result of thepandemic, but declined to 1.8% by end-1H21 on write-offs and robust loangrowth. Specific loan loss allowance (LLA) coverage of impaired loans (96% atend-1H21) is high and above peers'. Stage 2 loans (20% of gross loans atend-1H21; average LLA coverage of 3.6%) have increased significantly as aresult of the pandemic, and are concentrated, but are not expected to lead to amaterial increase in impaired loans.

Sterling delivers adequate profitability - asindicated by operating returns on risk-weighted assets that have averaged 1.4%over the past four full years - notwithstanding its high cost base reflectingits limited economies of scale. Margins are reasonable and in line with peers',underpinned by lending to higher-margin segments and, in 2020 and 1H21, growthin low-cost deposits. Loan impairment charges (LICs) continue to weigh onperformance (1H21: equal to 35% of pre-impairment operating profit).

Sterling's FCC ratio (14.5% at end-1H21) is a ratingstrength at the current rating level, underpinned by moderate pre-impairmentoperating profit (equal to 2.6% of average gross loans over the past four fullyears) and full LLA coverage of impaired loans. Its capital adequacy ratio(CAR; 15%) is comfortably above its 10% minimum requirement.

Funding is mainly in the form of customer deposits(78% in naira; 22% in FC at end-2020). The share of current and savingsaccounts (82% of customer deposits at end-1H21) has increased in recent years,reducing reliance on more price-sensitive and concentrated term deposits.Single-depositor concentration is moderate, with the 20-largest depositsrepresenting 20% of customer deposits at end-1H21. However, FC single-depositorconcentration is exceptionally high, with the two-largest depositorsrepresenting 34% of FC customer deposits. Its loans/deposits ratio is a low66%. Liquidity coverage is strong in local currency but weak in FC in thecontext of high concentration risk.

Support Rating andSupport Rating Floor

Sovereign support to commercial banks cannot be reliedon given Nigeria's weak ability to provide support, particularly in FC. TheSupport Rating Floor of all Nigerian banks is 'No Floor' and all SupportRatings are '5'. This reflects our view that senior creditors cannot rely onreceiving full and timely extraordinary support from the Nigerian sovereign ifany of the banks become non-viable.

National Ratings

Sterling's National Ratings are driven by the bank'sstandalone strength. The upgrade of Sterling's National Long-Term Ratingreflects the bank's increased creditworthiness relative to other Nigerianissuers'. Sterling's National Short-Term Rating of 'F2(nga)' is the lower oftwo possible options for a National Long-Term Rating of 'BBB+(nga)' underFitch's criteria, reflecting weaknesses in the bank's funding and liquidityprofile, which increases the vulnerability of default on its short-termlocal-currency obligations within Nigeria. 

Rating Sensitivities

Factors that could, individually or collectively, leadto negative rating action/downgrade:

• Erosion of capital buffers to levels close to orbelow the bank's minimum regulatory requirements, which could result from asignificant increase in impaired loans leading to losses.
• A significant tightening in FC liquidity, mostlikely due to single-depositor concentration risk.

Factors that could, individually or collectively, leadto positive rating action/upgrade:

• Upside to the ratings is unlikely at present unlessthe bank's franchise and funding and liquidity profile materially strengthen.

National Ratings

The National Ratings are sensitive to Fitch's view ofthe entity's creditworthiness relative to other Nigerian issuers'.

Best/Worst Case RatingScenario

International scale credit ratings of FinancialInstitutions and Covered Bond issuers have a best-case rating upgrade scenario(defined as the 99th percentile of rating transitions, measured in a positivedirection) of three notches over a three-year rating horizon; and a worst-caserating downgrade scenario (defined as the 99th percentile of ratingtransitions, measured in a negative direction) of four notches over threeyears. The complete span of best- and worst-case scenario credit ratings forall rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenariocredit ratings are based on historical performance.

ESG Considerations

Unless otherwise disclosed in this section, thehighest level of ESG credit relevance is a score of '3'. This means ESG issuesare credit-neutral or have only a minimal credit impact on the entity, eitherdue to their nature or the way in which they are being managed by the entity.

Related News

1. Sterling Bank Unveils Africa's First Free Banking Services For NGOs
2. Sterling Bank Plc Reports N5.7bn PAT in Q2 2021 Unaudited Results,(Share Price:N1.51k)
3. Moody's Announces Completion of a Periodic Review of Ratings of Sterling Bank Plc
4. STERLNBANK Declares N11bn PAT in 2020 Audited Results, Proposes N0.5K Final Dividend; (SP:N1.70k)
5. STERLNBANK Appoints Mr. Prasad and Mr. Tripathi as Non-Executive Directors
6. STERLNBANK Declares N11.7bn PAT in Q4 2020 Unaudited Results, (SP:N1.94k)
7. STERLNBANK Declares N7.4bn PAT in Q3 2020 Unaudited Results, (SP:N2.09k)
8. STERLNBANK Notifies of Board Meeting Date and Commencement of Closed Period
9. Fitch Affirms Sterling Bank at 'B-' Stable; off Rating Watch Negative
10. Moody's Announces Completion of a Periodic Review of Ratings of Sterling Bank Plc
11. Sterling Bank Board Approves 2019 Audited Financial Statements; Awaits Regulatory Approval
12. Sterling Bank Plc Q3 2019 Results: Increased OPEX Drags Pre-tax Profit
13. Arab Bank For Economic Development In Africa Extends $65m Credit Facilities To Sterling Bank Plc