Moody’s Downgrades the Long-term Ratings of Nine Nigerian Banks to B3 from B2, Places Ratings on Review for Further Downgrade

Rating action follows the downgrade of the sovereign rating to B3 from B2, and the placement of the government rating on review for downgrade

Moody’s Investors Service (“Moody’s”) has downgraded the long-term deposit ratings to B3 from B2, as well as senior unsecured debt ratings, where applicable, of all the Moody’s rated banks in Nigeria: 

1. Access Bank Plc, 
2. Zenith Bank Plc, 
3. First Bank of Nigeria Limited, 
4. United Bank for Africa Plc, 
5. Guaranty Trust Bank Limited, 
6. Union Bank of Nigeria plc, 
7. Fidelity Bank plc, 
8. FCMB (First City Monument Bank) Limited and 
9. Sterling Bank Plc. 

At the same time, Moody’s has placed the long-term deposit ratings, as well as senior unsecured debt ratings, where applicable, of the nine Nigerian banks on review for further downgrade.

Today’s rating actions follow Moody’s decision on 21 October 2022 to downgrade the long-term issuer rating of the Government of Nigeria to B3 from B2, and to place the rating of the Government of Nigeria on review for downgrade. 

The review for downgrade on the rating of the Government of Nigeria will focus on understanding the Nigerian authorities’ strategy to address both domestic and external pressures and assessing the associated default risk for the government’s private creditors. On 13 October 2022, the government publicly stated possible options, consisting of extending the maturity of its debts, including through potential bond buybacks or exchanges, which may constitute a distressed exchange under Moody’s default definition.

Ratings Rationale

Downgrade of Long-Term Ratings Reflects Weakening in Government Support Capacity, as Well as Interlinkages Between the Creditworthiness of the Sovereign and the Banks’ Balance Sheets

Moody’s decision to downgrade the long-term ratings of nine Nigerian banks reflects a combination of (i) the weakening in the Nigerian government’s fiscal capacity to support the country’s banks in case of need, as indicated by downgrade of the sovereign rating to B3 from B2; as well as (ii) the interlinkages between the sovereign’s weakened creditworthiness and the banks’ balance sheets, given the banks’ significant holdings of sovereign debt securities.

The downgrade of the rating of the Government of Nigeria reflects the deterioration in Nigeria’s government finances as well as its external position, exerting increasing pressure on the sovereign credit profile notwithstanding the strong increase in international crude oil prices in 2022. Moody’s assessment is that these developments are partly the result of weak governance and likely to last. The steep fall in oil production in 2022 and the extension of the expensive oil subsidy have almost entirely eroded the boost to government revenue and exports that would otherwise have been anticipated from higher oil prices. Policy levers available to manage weaker oil revenue and rising borrowing costs amid monetary tightening in Nigeria and globally are limited. Similarly, on the external front, the capacity of the Central Bank of Nigeria (CBN) to protect foreign exchange reserves from external outflows has its limits.

Placement Of Long-Term Ratings On Review For Further Downgrade

Moody’s banks ratings were already placed on review for downgrade on 13 October 2022 to reflect (a) the risk of increasing foreign currency rationing that could compromise the banks’ operational ability to meet their foreign currency obligations, as well as (b) the risk arising from a potential material depreciation in the country’s foreign exchange rate to the banks’ capitalisation and asset quality.

Following the review for downgrade of the sovereign on 21 October 2022, we have placed the banks’ long-term ratings on review for further downgrade in order to incorporate the review for downgrade on the rating of the Government of Nigeria.

The review for downgrade on the rating of the Government of Nigeria reflects the risk that the ongoing fiscal and external deterioration accelerates, weakening further the government’s capacity to service debt and thereby increasing further its risk of default. The review will focus on understanding the Nigerian authorities’ strategy to address both domestic and external pressures and assessing the associated default risk for the government’s private creditors. On 13 October 2022, the government publicly stated possible options, consisting of extending the maturity of its debts, including through potential bond buybacks or exchanges, which may constitute a distressed exchange under Moody’s default definition.

Extention of Review

The review on the NG-1 domestic NSR short-term Counterparty Risk Ratings of all nine banks has been extended. The review on the b3 Baseline Credit Assessments, the b3 Adjusted Baseline Credit Assessments, the B2(cr) long-term Counterparty Risk Assessments, the A2.ng domestic NSR long-term Counterparty Risk Ratings and the B2 domestic long-term Counterparty Risk Ratings has been extended for the following five banks: First Bank of Nigeria Limited, Union Bank of Nigeria plc, Fidelity Bank plc, FCMB (First City Monument Bank) Limited and Sterling Bank Plc.

Factors That Could Lead to an Upgrade or Downgrade of The Ratings

Downwards pressure on the ratings could materialise if (a) the credit profile of the sovereign weakens further, as would be indicated by a downgrade in the sovereign rating; or (b) the review concludes that the constrained availability of foreign currency in the country is likely to impair the banks’ capacity to operationally meet their foreign currency obligations, and/or (c) the review concludes that the banks’ balance sheet lack the resilience necessary to withstand a potential material depreciation  in the local currency. The aforementioned challenges could be captured by a lowering of the banking Macro Profile for Nigeria.

Upwards pressure on the ratings is limited given the current review for downgrade. A confirmation of the current ratings at the end of the review period could result from (a) resilience in the credit profile of the Government of Nigeria, as would be indicated by a confirmation of the rating of the Government of Nigeria; or (b) an assessment that the banks have the operational ability to continue to meet their foreign currency obligations in case the foreign currency liquidity shortages were to continue for an extended period of time; or (c) an assessment that the banks’ balance sheets are resilient enough to withstand a potential material depreciation  in the local currency in the context of a potential convergence of official and parallel market foreign currency exchange rates.