Ratings agency, Fitch took a dim view of the intrinsic creditworthiness of Ecobank Transnational Incorporated (ETI) and its local unit Ecobank Nigeria, placing both entities on watch for a potential downgrade.
The two are in line to take a hit in their Viability Ratings
(VRs) and Long-Term Issuer Default Ratings (IDRs) on the heels of the move to
allow the naira to weaken by about 40 per cent in June.
While VR assesses the innate creditworthiness of issuers,
IDR is the metric indicating an issuer’s relative vulnerability to default on
financial obligations.
ETI, which has footprints in 35 sub-Saharan African
countries, counts Nigeria as its largest market.
Fitch noted in a Monday that putting the two organisations’
VR of ‘b-’ and IDR of ‘B-‘ on Rating Watch Negative highlights the risk of the
entities falling short of their minimum capital requirements following “the
direct effect of the devaluation.”
Ecobank Nigeria is particularly susceptible on account of
the elevated uncertainty around the capital from its huge impaired loans that
are denominated in foreign currency.
The lender’s credit quality sharply deteriorated in the wake
of weakening the naira, Fitch said, setting the stage for a bigger allowance
for impairment and raising the odds that the bank’s capital adequacy ratio will
be further strained.
“Fitch has also placed ENG’s Shareholder Support Rating
(SSR) of ‘ccc+’ on RWN, reflecting the potential for ETI’s ability to provide
shareholder support, if required, to be weakened following the devaluation,”
the document said.
“Fitch expects to resolve the RWN within the next six months
when exchange-rate volatility may recede, the impact on regulatory capital
ratios and common equity double leverage is clear, and the scale of the
second-order economic effects of the devaluation on loan quality becomes
evident,” it added.
The naira plunged in value by 63 per cent to the U.S. dollar
in the official market in the seventeen days to the end of June following a
whirlwind of monetary reforms by newly inaugurated President Bola Tinubu
targeting harmonisation of Nigeria’s web of exchange rates.
A departure from a tightly controlled currency market to an
era of managed float, where exchange rate movement will be largely shaped by
market forces, is intriguing investors and restoring confidence.
Although the reforms closed up the spread between the black
market and the official exchange rates, a gulf as wide as 60 per cent before
the naira was weakened to a historic low last month, the new development
implies debts and loans denominated in dollars will likely balloon in local
currency.
Fitch is projecting Nigeria’s foreign exchange overhaul will
have sweeping macro-economic implications in the near term even though it could
favour the country’s sovereign credit profile.