Fitch Ratings – London – 21 Sep 2021: Fitch Ratings has affirmed Nigeria-based Bank of Industry Limited’s (BOI) Long-Term Issuer Default Rating (IDR) at ‘B’ with a Stable Outlook.
Fitch has also upgraded BOI’s National Long-Term Rating to ‘AAA(nga)’ from ‘AA+(nga)’, reflecting our view of an increased likelihood of support from the Nigerian authorities for the bank’s local currency obligations. A full list of rating actions is provided below.
KEY RATING DRIVERS
IDRs, SUPPORT RATING FLOOR AND NATIONAL RATING
The affirmation of BOI’s ‘B’ Long- and Short-Term IDRs, ‘B’ Support Rating Floor (SRF) and Support Rating of ‘4’ reflects Fitch’s view of potential support the bank could receive from the Nigerian authorities in case of need. The Stable Outlook on BOI’s Long-Term IDR mirrors that on the sovereign.
BOI’s Long-Term IDR and SRF are equalised with the Long-Term IDR of the sovereign as we believe that the Nigerian authorities have a high propensity to support BOI. Our assessment primarily reflects (i) the bank’s important and clearly defined policy role in funding economic growth in Nigeria; (ii) its 99.9% state ownership, split between the Ministry of Finance (94.8%) and the Central Bank of Nigeria (CBN; 5.1%); and (iii) the entirety of the bank’s wholesale funding being either provided or guaranteed by the Nigerian state. However, Fitch also views the ability of the authorities to support BOI as limited by Nigeria’s ‘B’ Long-Term IDR.
BOI is Nigeria’s primary development bank, with the mandate of financing the country’s emerging industrial sector. The bank plays an important role in supporting government policies and in providing counter-cyclical loans since the onset of the economic crisis resulting from the coronavirus pandemic.
BOI’s funding has increased substantially since March 2020, as the bank secured two large syndicated loan facilities of EUR1 billion and USD1 billion from syndicates of commercial banks and multilateral development banks, which are fully guaranteed by the CBN. The proceeds of the borrowings are swapped with the CBN, boosting its foreign-exchange (FX) reserves and providing BOI with Nigerian naira to support its developmental activities. BOI’s management has indicated that this fundraising will serve to expand the bank’s lending to priority sectors. It might take BOI substantial time to channel the recently attracted funding to borrowers and as of end-1H21, 48% of BOI’s total assets were kept in liquid government bonds and cash, compared with 20% at end-2019.
BOI maintains solid capitalisation and leverage metrics (end-1H21: equity-to-asset ratio of 19.4%), which is prudent for the bank’s exposure to the volatile operating environment. Profitability is not a key objective; however, BOI continues to generate reasonable returns on equity (1H21: 18% annualised) driven by healthy net interest margins and, so far, moderate loan impairment charges.
NATIONAL RATINGS
The upgrade of BOI’s Long-Term National Rating of ‘AAA(nga)’ reflects our view that the linkage between the bank and the sovereign has strengthened, as evident in the significant size of the CBN guarantees provided for BOI’s recent external funding. At present, all of BOI’s funding is either guaranteed or provided by the CBN or the Federal Government of Nigeria. In our view, this suggests that the sovereign propensity to provide extraordinary support to BOI in local currency has increased.
VIABILITY RATING
As is usual for development banks, Fitch does not assign a Viability Rating to BOI. This is because its business model depends on state support and, in our view, could not be carried out on a commercial basis.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The most immediate downside rating sensitivity for BOI’s IDRs and SRF is a downgrade of Nigeria’s sovereign ratings.
BOI’s ratings are also sensitive to a reduced propensity of the authorities to support the bank. This could be indicated by a change in BOI’s policy role, such as a shift into commercial activities, or a material reduction in government ownership. However, this is unlikely in the foreseeable future.
BOI’s National Ratings are sensitive to a negative change in Fitch’s opinion of the bank’s creditworthiness relative to that of domestic peers. This could arise from a change in our view of BOI’s role and importance to the sovereign, including, but not limited to, materially lower funding guarantees or weaker support for BOI from the authorities.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of BOI’s IDRs and upward revision of SRF would require an upgrade of Nigeria’s sovereign ratings.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The ratings of BOI are equalised with the sovereign rating of Nigeria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
| ENTITY/DEBT | RATING | PRIOR | |||
|---|---|---|---|---|---|
| Bank of Industry Limited | LT IDR | B ° | Affirmed | B ° | |
| ST IDR | B | Affirmed | B | ||
| Natl LT | AAA(nga) | Upgrade | AA+(nga) | ||
| Natl ST | F1+(nga) | Affirmed | F1+(nga) | ||
| Support | 4 | Affirmed | 4 | ||
| Support Floor | B | Affirmed | B | ||
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
- Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity)
- National Scale Rating Criteria (pub. 22 Dec 2020)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Bank of Industry Limited | UK Issued, EU Endorsed |
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