Nigerian banks: Black gold down

Nigerian bank bonds are 80-220bps wider than on 6 March. The Zenith Bank and UBA bonds have performed better than the Access Bank and Fidelity Bank securities so far. We downgrade Fidelity Bank back to Hold. Classification as systemically important (if this does happen) is less likely to have the positive impact we anticipated in the current market. We are not making any other changes to our recommendations on these banks’ bonds at this time. However, we acknowledge that oil price weakness, if it persists, may continue to weigh on these lenders’ securities.

Figure 1: 1-day change in mid z-spreads (bps)

Source: Bloomberg, Tellimer Research. Based on indicative levels.

Figure 2: Mid Yield to Maturity (%) 

Source: Bloomberg, Tellimer Research. Indicative levels only.

Within our coverage universe, Nigerian banks are among the most exposed to the vagaries of the market for crude oil. Lending to companies in the oil and gas sector remains significant. Added to this, the banks remain key holders of all forms of Nigerian government securities. As is well known, the sovereign is reliant on oil sales to generate foreign currency earnings. In light of recent events, we highlight 8 key talking points regarding Nigerian banks:

1. It’s a smaller eurobond market than before. There are just four USD-denominated Nigerian bank eurobonds, issued by four different lenders and with cUS$1.3bn outstanding. All four securities are senior bonds (though we note that the subordinated bonds that were outstanding did not have loss absorption language and were all redeemed at the first call dates). One of the Nigerian bank bonds is the Zenith Bank 7.375% 2022 security, which now totals just US$107mn, following a buyback in 2019. Only one of the banks did not have any bonds outstanding in 2015/2016 – UBA. Thus, for three of the four, we have been here before. Separately, it may be interesting to note that FBN and GT Bank went through two crises with Eurobond outstanding – 2008/09 and 2015/2016. Both banks have now exited the eurobond market. Twice bitten, forever shy perhaps?
   
   
   Table 1: Nigerian banks – US$ eurobonds

   Ticker	Coupon	Maturity	Currency	Amount Out	Ranking
   ACCESS	10.500	19/10/2021	USD	300mn	Snr Unsecured
   FIDBAN	10.500	16/10/2022	USD	400mn	Snr Unsecured
   UBANL	7.750	08/06/2022	USD	500mn	Snr Unsecured
   ZENITH	7.375	30/05/2022	USD	107mn	Snr Unsecured

   Source: Bloomberg, Tellimer Research
2. No Nigerian bank eurobonds mature this year. The next maturity date is 19 October 2021. Access Bank is due to repay a US$300mn bond on that day. Below, we have produced a coupon payment calendar, for those that may be keen to follow these dates. We stress that we currently expect all banks to maintain payments due on these USD-denominated securities.
   
   
   Table 2: 2020 coupon payment calendar

   Date	Bank	Amount (US$mn)
   16-Apr-20	Fidelity Bank	21.00
   19-Apr-20	Access Bank	15.75
   30-May-20	Zenith Bank	2.64
   08-Jun-20	UBA	19.38
   16-Oct-20	Fidelity Bank	21.00
   19-Oct-20	Access Bank	15.75
   30-Nov-20	Zenith Bank	3.96
   08-Dec-20	UBA	19.38

   Source: Bloomberg, Tellimer Research
3. Exposure to the oil and gas sector is still significant. Table 3 below compares the most recent oil and gas sector exposure disclosures to end-2015 disclosures for the four banks with eurobonds outstanding. Figures for UBA are based on net loans and advances. Further, all figures are as of December of the relevant years, except Fidelity Bank’s 2019 figures, which are as of September. Renegotiation of some of these exposures mean that the oil price assumed in loan contracts is now much lower than was the case in 2015. However, we note that previous comments from Nigerian bank management suggest that these contracts assumed US$40-45/bbl levels. Thus, if oil prices remain at current levels for a prolonged period, there may be questions about these previously-renegotiated contracts.
   
   
   Table 3: Oil & gas exposure as % loans

   Bank	2015	2019
   Access Bank	22.6%	28.0%
   Fidelity Bank	24.6%	22.6%
   UBA	19.5%	18.0%
   Zenith Bank	17.8%	25.2%

   Source: Company statements, Tellimer Research
4. Asset quality stress test shows banks’ resilience. We have updated our asset quality stress test for Nigerian banks. This test does not just focus on the banks’ exposures to oil and gas companies. This is because the impact of lower oil prices can be quite broad and may extend to seemingly unrelated companies/sectors. 9 Mobile is just one historical example of this. In our stress test, we assess four scenarios – impaired loans doubling, and the percentage of impaired loans rising to 10%, 20% and 30% of gross loans. We assume that banks maintain a minimum equity/assets ratio of 8%. The test shows that all four banks could keep coverage ratios above 100% even if impaired loan ratios rise to 10%. The table that follows is a summary of this stress test.
   
   
   Table 4: Stress-testing asset quality

   Ticker	ACCESS	FIDBAN	UBANL	ZENITH
   NGNmn/%	FY 19	FY 19	FY 19	FY 19
   Impaired loans	188,462	42,396	114,003	105,796
   Gross loans	3,102,970	1,178,389	2,147,283	2,462,359
   Total assets	7,146,610	2,116,296	5,604,052	6,346,879
   Total equity	610,193	233,734	597,978	941,886
   Loan loss reserves (incl. regulatory risk reserves)	209,483	53,446	136,730	158,853
   Total balance sheet cushion	819,676	287,180	734,708	1,100,739
   FY 19 pre-provision profit	135,568	25,510	129,539	267,326
   Total cushion	955,244	312,690	864,247	1,368,065
   Total capital required (at 8% of assets)	571,729	169,304	448,324	507,750
   Total cushion, less capital requirement	383,515	143,386	415,923	860,315
   Capital deficit/surplus – Full coverage
   A. Impaired loans x 2	6,590	58,594	187,917	648,723
   B. Impaired loans at 10%	73,218	25,547	201,195	614,079
   C. Impaired loans at 20%	-237,079	-92,291	-13,534	367,843
   D. Impaired loans at 30%	-547,376	-210,130	-228,262	121,607

   Source: Tellimer Research
5. This time may be a bit different. In 2015/2016, upstream oil and gas companies in Nigeria faced two challenges – lower prices and lower production levels. Production was impacted by damage on a key pipeline, the Trans Forcados Pipeline (TFP). The TFP is currently in operation. Having said that, oil producers also face a demand shock this time – the International Energy Agency (IEA) expects oil demand to fall for the first time in more than a decade. Given weaker demand, the overall effect on banks exposed to the oil and gas sector may still be material, especially if oil prices remain at current levels for a while. A rapid rebound in global (mainly Chinese) growth could help reduce this impact.
6. Taxes, levies are risks. A decline in oil sale receipts may put government finances under incremental strain. A reduction in payments to importers of refined crude oil products may help. However, while Nigeria’s debt to GDP is relatively low, the ratio of debt service to revenues is high. To grow revenues, authorities have already increased the focus on improving tax collection rates. The banking sector is generally profitable and authorities have already shown a willingness to impose additional costs on this sector. A banking sector-specific tax cannot be ruled out if oil prices stay depressed for a prolonged period. This is clearly not unique to Nigeria – we have seen such taxes imposed in other jurisdictions.
7. Risks to the NGN cannot be ignored. Lower oil prices may lead to increased concerns about the exchange rate. The official rate remains at NGN305/US$. However, all banks utilise NIFEX, NAFEX or some derivative of these rates in financial reporting. In a previous report, we assessed the potential impact of currency weakness on capital. We have updated that analysis in the table that follows. This shows that all four banks can still maintain double-digit total capital ratios under the most adverse scenarios. There are a few important caveats regarding this test:
   A. This is only a stress test, and we do not anticipate exchange rates reaching these levels.
   B. Our analysis assumes that the currency split of risk-weighted assets does not differ materially from that of financial assets.
   C. It is a very simple test and does not take into account actions banks (or indeed, the regulator) may take to mitigate the impact of a weaker NGN on reported capital ratios. Further, this very quick analysis assumes all foreign currencies move in line with the US dollar.
   D. NGN weakness may have a positive impact on profitability (where banks have long positions in foreign currency) and on total capital (where this includes foreign currency-denominated instruments). We have not taken these offsetting factors into account.
   
   Table 5: Potential impact of currency weakness on capital 

   Ticker	ACCESS	FIDBAN	UBANL	ZENITH
   Reporting period	FY 19	H1 19	FY 19	FY 19
   Risk-weighted assets	3,554,891	1,228,539	2,005,650	4,196,156
   Tier 1 ratio	14.1%	14.6%	18.8%	20.4%
   Total capital ratio	18.2%	17.0%	23.4%	21.7%
   US$ at NGN400
   Stressed RWAs	3,670,584	1,269,650	2,111,906	4,367,066
   Stressed T1 ratio	13.7%	14.2%	17.9%	19.6%
   Stressed CAR	17.6%	16.5%	22.3%	20.9%
   US$ at NGN500
   Stressed RWAs	3,959,819	1,372,428	2,377,545	4,794,340
   Stressed T1 ratio	12.7%	13.1%	15.9%	17.9%
   Stressed CAR	16.3%	15.2%	19.8%	19.0%
   US$ at NGN750
   Stressed RWAs	4,682,905	1,629,372	3,041,644	5,862,525
   Stressed T1 ratio	10.7%	11.0%	12.4%	14.6%
   Stressed CAR	13.8%	12.8%	15.4%	15.5%
   US$ at NGN1000
   Stressed RWAs	5,405,991	1,886,316	3,705,742	6,930,711
   Stressed T1 ratio	9.3%	9.5%	10.2%	12.4%
   Stressed CAR	11.9%	11.1%	12.7%	13.1%

   Source: Tellimer Research
   
   
8. Downgrades are possible – most ratings already carry negative outlooks. The sovereign’s ratings carry negative outlooks at all three major international rating agencies. As the table that follows shows, the banks have not been spared, where ratings are in line with that of the sovereign. Prolonged oil price weakness may lead to downgrades. For now, we expect the banks’ bond ratings to remain in the single-B category. However, as we have seen in previous instances, ‘performing’ bonds which are repaid may be rated triple-C or lower until that repayment happens. The First Bank of Nigeria subordinated bonds and the large Turkish banks’ Tier 2 instruments (including the Vakifbank bond which was called earlier this year) are examples of this.