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What Fitch Downgrade means for UBA and First Bank

1-first bank and uba

Fitch Ratings, a global credit rating company headquartered in New York (USA) and London (UK) released the result of its latest ratings of Nigerian banks, and announced downgrading the credit ratings of First Bank of Nigeria and United Bank of Africa (UBA)’s Long-Term Foreign Currency Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’. It, however, credited them  with stable outlook.

Fitch claimed the banks are more vulnerable to not meeting their financial commitments, although they currently have the capacity to do so.

The downgrading which is due to Nigeria’s economic downturn gives a signal that adverse business, financial, or economic conditions will likely impair the banks capacity to meet its financial commitments.

The company’s ratings are used as a guide to investors as to which investments are most likely going to yield returns. It is based on factors such as how small an economic shift would be necessary to affect the standing of the bond, and how much, and what kind of debt is held by the company.

The Company said: “Fitch Ratings has downgraded First Bank of Nigeria Ltd’s (FBN) and United Bank for Africa’s (UBA) Long-Term Foreign Currency Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’. The Outlooks are Stable. The agency has also downgraded the National Long-Term Rating of FBN Holdings Plc (FBNH), the parent holding company of FBN, to ‘BBB+(nga)’ from ‘A(nga)’.

“Fitch has at the same time affirmed the IDRs of eight other Nigerian commercial banks and affirmed the Viability Ratings (VR) of all the banks.

“The Outlook on the Long-Term Foreign Currency IDR of one of the banks, Guaranty Trust Bank (GTB), has been revised to Stable from Negative due to continuing strong earnings and stronger-than-expected liquidity. Our rating actions follow the downgrade of Nigeria’s sovereign ratings on 23 June 2016.

“The IDRs of UBA, Access Bank (Access) and Wema Bank (Wema) are driven by both their stand alone strengths, reflected in their VRs, and by the likelihood of sovereign support, reflected in their SRFs.

“Their VRs and SRFs are at the same level. The IDRs of FBN, Diamond Bank (Diamond), Fidelity Bank (Fidelity), Union Bank (Union) and First City Monument Bank (FCMB) are driven by their SRFs.

“Fitch has revised the SRFs to ‘B’ from ‘B+’ for the systemically important banks, FBN, UBA, Zenith and GTB following the downgrade of Nigeria’s sovereign ratings. As a result, both FBN’s and UBA’s IDRs have been downgraded to ‘B’ from ‘B+’. The IDRs of both Zenith and GTB are affirmed at ‘B+’ and are now driven by their respective VRs of ‘b+’.

“The systemically important banks’ SRFs remain a notch below the sovereign rating, reflecting the sovereign’s weak foreign currency position.”

Fitch attributed the recent downgrade of the nation’s sovereign credit rating on June 23, 2016 for their decision.

Based on the report, Nigerian banks will remain stable and profitable in 2016 despite slower asset growth and higher loan impairment charges. Recent devaluation of the naira, sustained low crude oil pricing and rising non-performing loans poses serious threats to the industry.

However, Fitch affirmed the IDRs of eight other Nigerian commercial banks and affirmed the Viability Ratings (VR) of all the banks. The Outlook on the Long-Term Foreign Currency IDR of one of the banks, Guaranty Trust Bank (GTB), has been revised to Stable from Negative due to continuing strong earnings and stronger-than-expected liquidity.

Fitch Ratings Inc, founded by John Knowles Fitch on December 24, 1914 in New York City as the Fitch Publishing Company, is one of the three internationally recognized credit rating agencies, the other two being Moody’s and Standard & Poor’s.

The company was designated by the U.S. Securities and Exchange Commission in 1975 as one of the three nationally recognized statistical rating organizations (NRSRO) and its rating scale has gained international acceptance.

Below is a list of Fitch Rating and their Definitions

Long-Term Rating Scales

Issuer Credit Rating Scales

Rated entities in a number of sectors, including financial and non-financial corporations, sovereigns and insurance companies, are generally assigned Issuer Default Ratings (IDRs).  IDRs opine on an entity’s relative vulnerability to default on financial obligations.

AAA: Highest credit quality.

‘AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

AA: Very high credit quality.

‘AA’ ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A: High credit quality.

‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

BBB: Good credit quality.

‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

 

 

BB: Speculative.

‘BB’ ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.

B: Highly speculative.

‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.

CCC: Substantial credit risk.

Default is a real possibility.

CC: Very high levels of credit risk. Default of some kind appears probable.

C: Exceptionally high levels of credit risk

Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a ‘C’ category rating for an issuer include:

  1. the issuer has entered into a grace or cure period following non-payment of a material financial obligation;
  2. the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or
  3. Fitch Ratings otherwise believes a condition of ‘RD’ or ‘D’ to be imminent or inevitable, including through the formal announcement of a distressed debt exchange.

RD: Restricted default.

‘RD’ ratings indicate an issuer that in Fitch Ratings’ opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased operating. This would include:

  1. the selective payment default on a specific class or currency of debt;
  2. the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation;
  3. the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or
  4. execution of a distressed debt exchange on one or more material financial obligations.

D: Default.

‘D’ ratings indicate an issuer that in Fitch Ratings’ opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.

 

 

Fitch short-term rating scale

A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation.

F1: Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

F2: Good short-term credit quality.

Good intrinsic capacity for timely payment of financial commitments.

F3: Fair short-term credit quality.

The intrinsic capacity for timely payment of financial commitments is adequate.

B: Speculative short-term credit quality.

Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.

C: High short-term default risk. Default is a real possibility.

RD: Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Applicable to entity ratings only.

D: Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.

 

Short-Term Ratings

A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as “short term” based on market convention

F1: Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

F2: Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.

F3: Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.

B: Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.

 

C: High short-term default risk. Default is a real possibility.

RD: Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Applicable to entity ratings only.

D: Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.

 

National Long-Term Credit Ratings

AAA(nga) ‘AAA’ National Ratings denote the highest rating assigned by the agency in its National Rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

AA(nga) ‘AA’ National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherent differs only slightly from that of the country’s highest rated issuers or obligations.

A(nga) ‘A’ National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

BBB(nga) ‘BBB’ National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher rated category.

BB(nga) ‘BB’ National Ratings denote an elevated default risk relative to other issuers or obligations in the same country. Within the context of the country, payment is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time.

B(nga) ‘B’ National Ratings denote a significantly elevated default risk relative to other issuers or obligations in the same country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment. For individual obligations, this rating may indicate distressed or defaulted obligations with potential for extremely high recoveries.

CCC(nga) ‘CCC’ National Ratings denote that default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions.

CC(nga) ‘CC’ National Ratings denote that default of some kind appears probable.

C(nga) ‘C’ National Ratings denote that default is imminent.

RD(nga): Restricted default. ‘RD’ ratings indicate an issuer that in Fitch Ratings’ opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased business.

 

Bank Viability Ratings

Viability ratings (VRs) are designed to be internationally comparable and represent Fitch’s view as to the intrinsic creditworthiness of an issuer. Together with the agency’s support ratings framework, the VR is a key component of a bank’s Issuer Default Rating (IDR).

aaa: Highest fundamental credit quality ‘aaa’ ratings denote the best prospects for ongoing viability and lowest expectation of failure risk. They are assigned only to banks with extremely strong and stable fundamental characteristics, such that they are most unlikely to have to rely on extraordinary support to avoid default. This capacity is highly unlikely to be adversely affected by foreseeable events.

 

aa: Very high fundamental credit quality ‘aa’ ratings denote very strong prospects for ongoing viability. Fundamental characteristics are very strong and stable; such that it is considered highly unlikely that the bank would have to rely on extraordinary support to avoid default. This capacity is not significantly vulnerable to foreseeable events.

 

a: High fundamental credit quality ‘a’ ratings denote strong prospects for ongoing viability. Fundamental characteristics are strong and stable, such that it is unlikely that the bank would have to rely on extraordinary support to avoid default. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

bbb: Good fundamental credit quality ‘bbb’ ratings denote good prospects for ongoing viability. The bank’s fundamentals are adequate, such that there is a low risk that it would have to rely on extraordinary support to avoid default. However, adverse business or economic conditions are more likely to impair this capacity.

bb: Speculative fundamental credit quality ‘bb’ ratings denote moderate prospects for ongoing viability. A moderate degree of fundamental financial strength exists, which would have to be eroded before the bank would have to rely on extraordinary support to avoid default. However, an elevated vulnerability exists to adverse changes in business or economic conditions over time.

b: Highly speculative fundamental credit quality ‘b’ ratings denote weak prospects for ongoing viability. Material failure risk is present but a limited margin of safety remains. The bank’s capacity for continued unsupported operation is vulnerable to deterioration in the business and economic environment.

ccc: Substantial fundamental credit risk Failure of the bank is a real possibility. The capacity for continued unsupported operation is highly vulnerable to deterioration in the business and economic environment.

cc Very high levels of fundamental credit risk Failure of the bank appears probable.

c: Exceptionally high levels of fundamental credit risk Failure of the bank is imminent or inevitable.

f ‘f’ ratings indicate an issuer that, in Fitch’s opinion, has failed, and that either has defaulted or would have defaulted had it not received extraordinary support or benefited from other extraordinary measures.

 

 

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