Fitch Ratings has downgraded Ecobank Ghana Limited’s, Guaranty Trust Bank (Ghana) Limited’s (GTB Ghana) and United Bank for Africa (Ghana) Limited’s (UBA Ghana) Viability Ratings (VRs) to ‘ccc’ from ‘b-‘.
Fitch has affirmed the Shareholder Support Ratings (SSRs) of Ecobank Ghana at ‘ccc+’ and of GTB Ghana and UBA Ghana at ‘b-‘.
The Long-Term Issuer Default Rating (IDR) of Ecobank Ghana has therefore been downgraded to ‘CCC+ from ‘B-‘ while those of GTB Ghana and UBA Ghana have been affirmed at ‘B-‘. The Outlook on the Long-Term IDRs is Stable.
The rating actions follow the downgrade of Ghana’s Long-Term IDR to ‘CCC’ from ‘B-‘ on 10 August 2022. For more details see ‘Fitch Downgrades Ghana to ‘CCC” at www.fitchratings.com
Fitch has simultaneously withdrawn Ecobank Ghana’s ratings for commercial reasons and will no longer provide ratings and analytical coverage for Ecobank Ghana.
KEY RATING DRIVERS
LONG-TERM IDRs and SSRs
Following the downgrade of their VRs, the banks’ Long-Term IDRs are now solely driven by the likelihood of extraordinary support from their parents, Togo-based Ecobank Transnational Incorporated (ETI: B-/Stable) and Nigerian-based Guaranty Trust Bank Limited (GTB: B/Stable) and United Bank for Africa Plc (UBA: B/Stable). The Stable Outlook on the Long-Term IDRs reflects those on their parents’ Long-Term IDRs. GTB Ghana’s and UBA Ghana’s Long-Term IDR is at the same level as Ghana’s Country Ceiling of ‘B-‘, which captures Fitch’s view of transfer and convertibility risk within Ghana.
UBA Ghana’s and GTB Ghana’s SSR of ‘b-‘ reflect a limited probability of extraordinary shareholder support, if required. Fitch believes GTB and UBA to have a high propensity to provide support given the subsidiaries’ importance to the parents’ pan-African strategies and their substantial contribution to group net income. However, GTB’s and UBA’s ability to provide support is limited by their own creditworthiness, as expressed by their respective Long-Term IDRs.
Ecobank Ghana’s SSR of ‘ccc+’ reflects Fitch’s view that, although possible, extraordinary support from ETI cannot be relied on. Fitch believes ETI has a high propensity to support Ecobank Ghana, reflecting the latter’s strategically important role in the group as a key contributor to earnings and strong franchise in Ghana. However, ETI’s ability to provide support, is constrained by the group’s own creditworthiness and Ecobank Ghana’s fairly large size relative to that of the group (11% of consolidated assets at end-1H22).
VRs
The downgrade of the three banks’ VRs follows the downgrade of Ghana’s Long-Term IDRs as the banks’ standalone credit profiles are closely linked to that of the sovereign. This reflects the concentration of their operations within Ghana, strong reliance on sovereign-derived income and high exposure to the sovereign relative to capital. The VRs are one notch below their ‘ccc+’ implied VRs, reflecting the operating environment/sovereign rating Constraint.
Operating conditions have weakened notably in 2022. Inflation increased sharply to 31.7% in July as a result of higher commodity prices that have been exacerbated by exchange-rate pressures, with the Ghanaian cedi depreciating 35% against the US dollar to date. This has prompted the Bank of Ghana to increase the policy rate by 750bp so far this year, including a 300bp hike on 17 August following an emergency meeting of the monetary policy committee. Fitch expects real GDP growth to slow to 4% in 2022 and 5.3% in 2023.
Macro-economic volatility, in particular higher interest rates, will burden borrowers and result in higher impaired loans for the banks towards end-2022. However, loan-quality risks are mitigated by the banks’ small loan books (ranging between 21% and 32% of total assets at end-1H22), with broader asset quality being more closely aligned with sovereign creditworthiness due to large holdings of Ghanaian sovereign securities. Sovereign securities exposure is largely in local currency but the banks have moderate holdings of Ghanaian sovereign eurobonds.
Underlying profitability should remain strong in the short term as net interest margins benefit from a significant increase in treasury bill yields, which should offset greater non-interest expenses resulting from higher inflation and increased loan impairment charges. Impact on net income from mark-to-market losses on sovereign securities should be moderate.
However, we see significant downside risk to profitability from potential sovereign debt restructuring, especially if local-currency debt is included. Profitability is highly reliant on sovereign-derived income, as indicated by interest-income on government securities representing between 49% and 74% of total interest income in 2021.
The cedi depreciation will exert downward pressure on common equity Tier 1 (CET1) ratios (Ecobank Ghana: 14%; GTB Ghana: 42%; UBA Ghana: 23%, all at end-1H22) as a result of foreign-currency risk-weighted asset (RWA) inflation but the banks remain comfortably above the minimum regulatory requirement. However, sovereign securities exposure is particularly high relative to CET1 capital (Ecobank Ghana: 336% at end-2021; GTB Ghana: 189% at end-1H22; UBA Ghana: 325% at end-1H22) resulting in high sensitivity of the banks’ capitalisation to sovereign debt treatment, particularly in local currency.
The banks have low gross loans/customer deposits ratios, are almost entirely funded by domestic customer deposits, and therefore less prone to capital flight. Local-currency liquidity coverage is strong as a result of large holdings of sovereign securities, whereas foreign-currency liquidity is healthy in view of substantial placements with international banks and the benefits of ordinary parental support.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
No longer relevant for Ecobank Ghana as the ratings have been withdrawn.
The Long-Term IDRs of GTB Ghana and UBA Ghana would be downgraded if their respective SSRs are downgraded. The latter could be downgraded if the parents’ Long-Term IDRs are downgraded or if the ability of subsidiaries to use parental support is restricted by a downward revision of Ghana’s Country Ceiling, which captures Fitch’s view of transfer and convertibility risk within Ghana.
A downgrade of Ghana’s Long-Term IDRs could result in a downgrade of the VRs, given that the banks’ standalone credit profiles are closely linked to that of the sovereign.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
No longer relevant for Ecobank Ghana as the ratings have been withdrawn.
An upgrade of the Long-Term IDRs of GTB Ghana and UBA Ghana would require an upgrade of their respective SSRs or multi-notch upgrade of the banks’ VRs.
An upgrade of GTB Ghana’s and UBA Ghana’s SSRs would require an upgrade of their parents’ Long-Term IDRs and an upward revision of Ghana’s Country Ceiling.
An upgrade of the VRs would require a sovereign rating upgrade and an improvement in operating conditions, while maintaining reasonable financial metrics.
VR ADJUSTMENTS
The operating environment scores of ‘ccc’ are below the ‘b’ category implied scores due to the following adjustment reason: sovereign rating (negative)
The earnings and profitability scores of ‘b-‘ are below the ‘bb’ category implied scores due to the following adjustment reason: revenue diversification (negative)
GTB Ghana’s and UBA Ghana’s capitalisation and leverage scores of ‘ccc+’ and ‘ccc’, respectively, are below the ‘bb’ category implied scores due to the following adjustment reason: risk profile and business model (negative)
GTB Ghana’s and UBA Ghana’s funding and liquidity scores of ‘b-‘ are below the ‘bb’ category implied scores due to the following adjustment reason: liquidity coverage (negative)
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The three banks’ Long-Term IDRs are directly linked to those of their parents.