Moody’s Investors Service (Moody’s) has placed on review for downgrade the long-term deposit ratings, as well as long-term issuer and senior unsecured debt ratings, where applicable, of the following nine Nigerian banks: 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.

Ratings Rationale

Placement of Long-Term Ratings on Review for Downgrade

Moody’s decision to place the long-term ratings of nine Nigerian banks on review for downgrade reflects the risk of increasing foreign currency rationing that could compromise the banks’ operational ability to meet their foreign currency obligations, as well as the risk arising from a potential material depreciation in the country’s foreign exchange rate to the banks’ capitalisation and asset quality.

Constraints on domestic oil production, capital outflows, and the increased cost of the country’s imported refined petroleum products, coupled with US dollar strengthening, have together weighed on the availability of foreign currency liquidity in the country despite higher oil prices and material discrepancies between official and parallel market exchange rates persist in the country. Nigeria’s foreign exchange reserves have declined to $38 billion as of September 2022 from $40 billion as of January 2022 despite higher oil prices, and we understand that the central bank, which is the main provider of foreign exchange in the country, has consequently scaled down and become increasingly selective with its foreign currency allocations.

The review for downgrade on the long-term ratings of Nigerian banks also captures the risk that a potential material depreciation in the country’s foreign exchange rate could pose to the banks’ capitalisation and asset quality. On average, around 40% of loans extended by Moody’s-rated Nigerian banks as of December 2021 were denominated in foreign currencies, predominantly dollars. Some of these borrowers are vulnerable to a further depreciation of the naira because they do not earn foreign-currency income, and a weaker naira would harm their repayment capacity. The banks’ relatively high level of dollarisation also constrains the central bank’s capacity to act as a lender of last resort in case of need.

Focus of the Review

Moody’s rating review will focus on assessing the banks’ operational ability to meet their foreign currency obligations. The rating review will take into account the expected evolution in foreign exchange reserves, as well as the various tools at the banks’ disposal to conduct foreign currency  payments amid reduced availability of US dollars. Moody’s rating review will also assess the resilience of the banks’ foreign currency liquidity positions and risk management frameworks amid ongoing foreign currency rationing in Nigeria and tightening funding conditions globally.

Moody’s rating review will also evaluate the resilience of the banks’ balance sheets to a potential material depreciation in the country’s foreign exchange rate. In particular, the rating agency review will assess the extent to which the banks’ capitalisation buffers and foreign currency positions mitigate the risk from a potential material weakening in the local currency.

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

Downwards pressure on the ratings could materialise if the review concludes (a) 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 (b) 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 an assessment that (a) 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, and (b) their  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.