June 16, 2021/GCR Ratings
GCR Ratings (“GCR”) has upgraded the national scale long term rating assigned to Stanbic IBTC Bank PLC to AA+(NG) from AA(NG) and affirmed the national scale short term rating at A1+(NG), with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook|
|Stanbic IBTC Bank PLC||Long Term issuer||National||AA+(NG)||Stable|
|Short Term issuer||National||A1+(NG)|
Stanbic IBTC Bank PLC (“Stanbic IBTC” or “the bank”) is considered a core operating entity in Stanbic IBTC Holdings PLC (“the Group”), as such, the national scale Issuer ratings on the bank reflect the strengths and weaknesses of the Group.
The rating upgrade is underpinned by Stanbic IBTC’s sound competitive position, and resilient financial profile (particularly capitalisation and risk position) amidst the strains in the operating environment. Further supporting the rating is the robust financial and technical support from its ultimate parent, Standard Bank Group (“SBG”), the largest banking group in Africa in terms of balance sheet size and earnings.
Competitive position is a positive ratings factor, balanced by the Group’s strong and well-diversified business operations, spanning the full spectrum of the Nigerian financial landscape, such as: asset management, pension management, custodian services, insurance, trusteeship, stockbroking, among others. Leveraging its membership of the Group, the bank continues to harness inherent cross selling opportunities to serve a wide range of customers and ultimately enhance its financial performance and market position. Furthermore, the improved value propositions, sustained investment in information technology, as well as retail penetration strategy have seen the relatively cheaper and stable current and savings deposits increase consistently over the review period, thereby leading to 140bps moderation in cost of funds to 2.5% at FY20. The bank also evidenced good revenue growth and robust return on equity and assets over the last five years. Management & Governance is a neutral ratings factor.
Stanbic IBTC is adequately capitalised, with capital adequacy ratio consistently maintained well above the regulatory minimum of 10% over the review period. Similarly, GCR’s computed core capital ratio is considered robust at 25.1% at 1Q FY21 (FY20: 24.1%) largely supported by strong earnings accretions over the years. We believe the current capitalisation level provides adequate headroom for loss absorption, with the GCR core capital ratio expected to range between 23-24% over the next 12-18 months. While we believe earnings in FY21 may be somewhat impacted by sustained net interest margin compression and the absence of one-off trading gains realised in 2020, we think the bank’s loss absorption capacity will remain sound. Positively, loan loss provision is viewed to be adequate, with reserve coverage of impaired loans consistently maintained above 100% over the review period.
Risk is viewed to be somewhat contained, with non-performing loans (“NPL”) ratio of 3.6% at 1Q FY21 (FY20: 4.0%) broadly comparable with the regulatory tolerable limit of 5% and industry average of c.6%. Credit losses has also remained moderate, averaging 2.6% over the review period and stood at 1.6% at FY20. We expect the NPL ratio and credit losses to remain within similar range over the next 12-18 months. However, concentration risk by obligor is considered high, with the twenty largest exposures accounting for 52.4% of the loan portfolio at FY20. Also, Foreign currency (“FCY”) loans constituted a sizeable 48.1% of the loan portfolio at FY20 and measures above the estimated industry average of 35%. According to management, FCY risk is partly mitigated through natural hedging of credit facilities and extending FCY lending to obligors with FCY receivables. GCR is also cognisant of the bank’s significant exposures to market risk in view of the substantial market sensitive income realised in FY20.
Funding and liquidity is assessed at an intermediate level. The funding structure is sound, predominantly made up of the relatively stable deposits. At FY20, total deposits accounted for 78.8% of funding base (FY19: 75.3%), with the behaviourally sticky non-core deposits increasing significantly during the period. Furthermore, the bank evidenced a well-diversified deposit book, with the single and twenty largest depositors accounting for 4.6% and 23.8% of customer deposits respectively at FY20. Liquidity is positive, with liquid assets covering 4.4x and 71.2% of wholesale funding and customer deposits respectively at FY20. We also view the liquidity management of the FCY book to be sound, with FCY liquid assets covering around 33% of total FCY liabilities at FY20.
The national scale Issuer ratings benefit from parental support. The Group is 67.02% owned by SBG, which is headquartered and listed in South Africa, delivering finance solutions across twenty African countries. Though the Group is not a material asset or revenue contributor to SBG, there is evidence of support from and assimilation with the parent. We believe SBG has the capacity to support the Group and bank based on its sound financial profile and good geographic diversification.
The stable outlook reflects GCR’s expectation that Stanbic IBTC’s financial profile would remain resilient despite the strains in the operating environment. We anticipate a strong GCR core capital ratio, underpinned by solid internal capital generation and adequate loan loss reserving. Credit losses and NPL ratio are expected to be sustained at strong range, albeit with the loan book concentration by obligor and FCY anticipated to remain high. We also factored in adequate liquidity on account of the highly liquid balance sheet.
The rating could be upgraded if GCR core capital ratio is maintained above 30% on a sustainable basis, achieve a well-diversified loan book, moderation in credit losses to below 1%, as well as achieve significant improvement in competitive position and market share. Conversely, a downward rating movement could be triggered by material deterioration in capitalisation and asset quality metrics.