Fixed Income Analysis /

Nigerian banks: Black gold down

  • Within our coverage universe, Nigerian banks are among the most exposed to the vagaries of the market for crude oil

  • Nigerian bank bonds are 80-220bps wider than on 6 March

  • We discuss 8 key issues, including asset quality and potential currency weakness

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
9 March 2020
Published byTellimer Research

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
    TickerCouponMaturityCurrencyAmount OutRanking
    ACCESS10.50019/10/2021USD300mnSnr Unsecured
    FIDBAN10.50016/10/2022USD400mnSnr Unsecured
    UBANL7.75008/06/2022USD500mnSnr Unsecured
    ZENITH7.37530/05/2022USD107mnSnr 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
    DateBankAmount (US$mn)
    16-Apr-20Fidelity Bank21.00
    19-Apr-20Access Bank15.75
    30-May-20Zenith Bank2.64
    16-Oct-20Fidelity Bank21.00
    19-Oct-20Access Bank15.75
    30-Nov-20Zenith Bank3.96
    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
    Access Bank22.6%28.0%
    Fidelity Bank24.6%22.6%
    Zenith Bank17.8%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
    NGNmn/%FY 19FY 19FY 19FY 19
    Impaired loans188,46242,396114,003105,796
    Gross loans3,102,9701,178,3892,147,2832,462,359
    Total assets7,146,6102,116,2965,604,0526,346,879
    Total equity610,193233,734597,978941,886
    Loan loss reserves (incl. regulatory risk reserves)209,48353,446136,730158,853
    Total balance sheet cushion819,676287,180734,7081,100,739
    FY 19 pre-provision profit135,56825,510129,539267,326
    Total cushion955,244312,690864,2471,368,065
    Total capital required (at 8% of assets)571,729169,304448,324507,750
    Total cushion, less capital requirement383,515143,386415,923860,315
    Capital deficit/surplus – Full coverage
    A. Impaired loans x 26,59058,594187,917648,723
    B. Impaired loans at 10%73,21825,547201,195614,079
    C. Impaired loans at 20%-237,079-92,291-13,534367,843
    D. Impaired loans at 30%-547,376-210,130-228,262121,607
    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 
    Reporting periodFY 19H1 19FY 19FY 19
    Risk-weighted assets3,554,8911,228,5392,005,6504,196,156
    Tier 1 ratio14.1%14.6%18.8%20.4%
    Total capital ratio18.2%17.0%23.4%21.7%
    US$ at NGN400
    Stressed RWAs3,670,5841,269,6502,111,9064,367,066
    Stressed T1 ratio13.7%14.2%17.9%19.6%
    Stressed CAR17.6%16.5%22.3%20.9%
    US$ at NGN500
    Stressed RWAs3,959,8191,372,4282,377,5454,794,340
    Stressed T1 ratio12.7%13.1%15.9%17.9%
    Stressed CAR16.3%15.2%19.8%19.0%
    US$ at NGN750
    Stressed RWAs4,682,9051,629,3723,041,6445,862,525
    Stressed T1 ratio10.7%11.0%12.4%14.6%
    Stressed CAR13.8%12.8%15.4%15.5%
    US$ at NGN1000
    Stressed RWAs5,405,9911,886,3163,705,7426,930,711
    Stressed T1 ratio9.3%9.5%10.2%12.4%
    Stressed CAR11.9%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.
Table 6: Issuer ratings (including outlook)
Bank nameMoody'sS&PFitch
Access BankB2 (negative)B (negative)B (stable)
Fidelity BankB2 (negative)B- (stable)B- (stable)
UBAB2 (negative)B (negative)B+ (negative)
Zenith BankB2 (negative)B (negative)B+ (negative)
ource: Bloomberg