Tuesday 04, July 2017 by Matthew Amlôt

Nigeria-based Diamond Bank 'B-/B' and 'ngBB/ngB' ratings affirmed; outlook remains negative

S&P Global Ratings said today that it had affirmed its long-and short-term counterparty credit ratings on Nigeria-based Diamond Bank PLC at 'B-/B'. The outlook on the long-term global scale rating is negative.

“We also affirmed our long- and short-term Nigeria national scale ratings on the bank at 'ngBB/ngB'.

“We believe the significant short-term risk of weak US dollar liquidity has somewhat eased, a problem that was caused and ultimately resolved by a reliance on the Central Bank of Nigeria for the provision of foreign currency. However, longer-term risks remain for the bank, notably having nearly reached regulatory capital adequacy minimums and having poor asset quality. We believe the bank will ultimately weather this economic storm, through a range of capital optimisation measures and recovery of its large portfolio of non-performing loans (NPLs) as the price and production of oil increases and access to US dollars improves. Nevertheless, the bank's long-term profitability and risk management now compare more closely with the second tier of the Nigerian banking sector and therefore we have revised down our opinion on its business position to moderate.

“The long-term weakness in the operating environment and the devaluation of the naira prompted significant deterioration in the quality of the bank's loan book in 2016. Total NPLs (impaired loans plus loans more than 90 days overdue) accounted for 26 per cent of total loans at year end 2016, up from seven per cent at year-end 2015, despite a 5.7 per cent of charge-off gross loans in the year. Furthermore there is another 8.5 per cent of the loan book classified as past due (but below 90 days) as of year-end 2016. On Dec. 31, 2016, loan-loss reserves (excluding the regulatory risk reserves, which we include in our calculation of total adjusted capital) covered only a modest 27 per cent of total NPLs. A positive factor is that the natural resource loans are well collateralized and, given the improving oil price and production, we believe the recovery prospects on more than one-third of the NPLs are good. Oil and gas remains the largest contributor to impaired loans.

“Nevertheless, large credit losses remain an ongoing risk to the bank's profitability and capitalisation, and we expect them to remain at the current high levels (over five per cent of total loans) for the next 12-18 months. Given that it had almost reached the regulatory capital minimums, the bank is attempting a number of capital-raising and optimisation measures to improve capitalisation. These include increasing tier two capital, selling investment and recovery properties, and recovering bad debts. As of March 31, 2017, the bank's regulatory capital adequacy ratio was 15.1 per cent, down from 16.2 per cent a year earlier, largely due to the impact of the naira devaluation in June 2016 and weak earnings.

“We view positively the bank's recent success in easing its US dollar liquidity, thanks largely to the central bank's increased supply of dollars to the market. As of mid-year 2017, we expect the bank to have cleared its off-balance-sheet liabilities and settled or refinanced the foreign currency borrowed funds on the balance sheet. However, US dollar liquidity is still a risk across the sector, given the strained and concentrated nature of foreign currency supply in Nigeria and large deposit concentrations. Local currency funding and liquidity is stable.

“The negative outlook reflects the combined pressure on capital and risk. We believe Diamond Bank will face sustained credit losses over five per cent in the next 12-18 months, which will keep earnings--and therefore also internal capital generation--at low levels over the same period. Given the expected pressure on profitability and currently thin cushion above the 15 per cent minimum regulatory capital adequacy requirement, we believe that management actions will be required in the short to medium term

“We would lower the ratings if the bank's capital adequacy falls below regulatory minimum requirements or if there is a reversion to high foreign currency liquidity risks.

“We could revise the outlook to stable if the bank's capital adequacy, earnings, and capitalisation improve, alongside the ongoing alleviation of US dollar liquidity risks.”

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