Sequel to a recent judgment by the Federal High Court of Nigeria in a protracted legal dispute involving one of Ecobank Nigeria Limited’s (ENG) corporate clients, Fitch Ratings, London has chosen to maintain the bank’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ and its Viability Rating (VR) at ‘b-‘, both under the context of Rating Watch Negative (RWN).
The pre-existing RWN had already factored in potential risks related to Ecobank’s minimum total capital adequacy ratio (CAR) or capital-to-risk ratio requirement, attributed to the impact of naira devaluation and economic challenges on capital and asset quality.
The inclusion of this case in the watchlist compounds the numerous obstacles confronting Ecobank Nigeria’s operations and finances, particularly its capitalization, due to the recent court ruling.
Fitch Ratings Keeps Ecobank Rating Watch Negative Over legal Dispute, Court orders Ecobank to pay N72 billion
Fitch Ratings has sustained Ecobank Nigeria Limited’s (ENG) Long-Term Issuer Default Rating (IDR) of ‘B-‘ and Viability Rating (VR) of ‘b-‘ on Rating Watch Negative (RWN) following the protracted Federal High Court of Nigeria’s judgment on a lawsuit by one of ENG’s corporate clients.
The Federal High Court of Nigeria ruled in favor of the plaintiff, ordering Ecobank Nigeria to pay N72.2 billion in damages. While the bank has initiated an appeal against this verdict, the final resolution timeline remains uncertain. The High Court judgment, if upheld, would lead to a breach of ENG’s CAR requirement as the damages are large (end-2022: 31% of total regulatory capital).
The RWN already reflects the risk of the bank breaching its minimum total capital adequacy ratio (CAR) requirement due to the effect of the naira devaluation and other macroeconomic risks on capital and asset quality. The RWN now also incorporates further risks to ENG’s business profile and financial profile, in particular its capitalisation, stemming from the recent High Court judgement.
Fitch expects to resolve the RWN once there is more clarity on the outcome of the dispute and its implications for ENG, in addition to when the impact of the naira devaluation on capital ratios and asset quality becomes clear. The RWN may be maintained longer than six months if the dispute is not concluded within this timeframe.
The rating agency anticipates that the RWN will persist until there is more clarity surrounding the outcome of the legal dispute and its potential repercussions for the financial group. Furthermore, the evaluation also considers the eventual impact of naira devaluation on the banks’ capital ratios and asset quality. “If the legal dispute extends beyond six months, the Rating Watch Negative might be prolonged,” the rating agency said.
On Damages Pressure Weak Profitability, Fitch claims that Ecobank has notably weaker profitability than other commercial banks, with operating profit averaging just 0.4% of risk-weighted assets (RWAs) over the past four years. Weak profitability is influenced by a particularly narrow net interest margin (NIM) and high loan-impairment charges (LICs) that have accompanied asset-quality issues in recent years. The damages (equivalent to 6.9x of operating profit in 2022) would have a large negative impact on profitability if realised.
On Less Stable Funding, the rating agency submits that reliance on term-deposit funding (end-2022: 40% of customer deposits) is material. Deposit concentration is fairly high, with the 20 largest deposits representing 21% of customer deposits at end-2022. ENG has modest holdings of FC liquid assets relative to peers but benefits from ordinary FC liquidity support from the group. A material CAR breach may undermine depositor stability given high term deposits and depositor concentration.
Fitch cautioned that the size of these damages, amounting to 31 percent of Ecobank Nigeria’s total regulatory capital as of end-2022, could potentially breach the bank’s CAR requirement if the judgment is upheld. The rating agency adds that Ecobank’s SSR of ‘ccc+’ on RWN, reflecting the potential for the parent’s ability to provide support, if required, to be weakened by the naira devaluation. Fitch expects to resolve the RWN on the SSR within the next six months when the impact of the naira devaluationon ETI’s credit profile becomes clear.