Ecobank Transnational Incorporated (ETI), a Togo-based financial services company’s issuer rating has been affirmed at B2 by Moody’s, with the outlook changed from stable to negative.
Additionally, Moody’s has also affirmed ETI’s notional baseline credit assessment (BCA) and adjusted BCA of b2 and b1, respectively, based on ETI’s consolidated financial statements.
The rating agency has also assigned a first time senior unsecured foreign currency bond rating of B2 to ETI’s $500 million notes due 2024, with a negative outlook. The bond was issued earlier in 2019.
ETI’s rating affirmations reflect its stable funding and liquidity profile, bolstered by the bank’s deposit-based funding structure, limited reliance on riskier short-term market funding. This has also been lifted by the bank’s strong liquidity buffers, with cash and interbank balances alone accounting for 19% of total consolidated assets, according to Moody’s.
The rating agency also notes that ETI’s geographical and business diversification, being a pan-African bank, with subsidiaries in 33 African countries, can act as a counterweight in times of stress. This gives ETI a range of alternative sources of income and resources when other parts of the group may face challenges.
ETI’s ratings also reflect the group’s high asset risks, with the non-performing loans (NPLs)-to-gross loans ratio at 9.8%, as of March 2019. Moody’s expects asset quality pressures to remain, primarily driven by ETI’s operations in Nigeria.
The rating agency also expects asset quality pressures to be moderated by the regional acceleration in economic growth, the group’s strengthened risk management capabilities. Similarly, the rating agency considers the group’s capital buffers as modest, with the Moody’s adjusted tangible common equity-to-risk-weighted assets ratio estimated at 7% as of December 2018.
ETI’s ratings affirmation is also based on the probability that its major shareholders will remain committed long-term investors and will support the institution with additional capital in case of stress. As a result, Moody’s has incorporated a one notch rating uplift due to affiliate support, placing ETI’s notional adjusted BCA at b1.
As of December 2018, South Africa-based financial services company Nedbank Group held a 21.2% stake in ETI, with Qatar National Bank, a Qatar-based financial services company holding 20.1%.
Public Investment Corporation (PIC) is also a shareholder in the company, through the Government Employees Pension Fund (GEPF), which owns 13.5% of ETI.
The International Finance Corporation (IFC) also held a 14.1% stake in the company, as of December 2018.
However, ETI’s issuer rating is positioned one notch below this level, because holding company creditors are subordinated to creditors at banking subsidiaries in a bankruptcy or resolution context. This would likely lead to the group experiencing higher losses.
The change of the outlook to negative primarily reflects the significant increase in ETI’s double leverage during 2018 and significant financial challenges faced by Ecobank Nigeria, the group’s largest subsidiary.
Moody’s notes that ETI’s double leverage, a situation where the holding company borrows to invest in the equity of its subsidiaries has materially increased. This creates reliance on dividends to finance interest expenses and bond repayments.
This is evidenced by the ratio of investments in subsidiaries as a percentage of the parent company’s equity which increased to 150% in 2018 from 102% in 2017. The 2017 figure was later restated to 114%.
Similarly, the group’s Nigerian subsidiary reported a pre-provision loss during the first quarter of 2019 and an 8% year-on-year drop in total assets. Unless these trends are reversed, they could place pressure on the group’s overall profitability and asset quality metrics according to the rating agency. The increase in double leverage could also warrant an additional notching for structural subordination, Moody’s added.
The rating agency also notes, however, that against these risks, management has set out a clear plan to reduce double leverage over the next 18 months.
This is primarily supported by dividend upstreaming from subsidiary banks and the expectation that the $400 million convertible debt will be converted into equity before October 2022.
In addition, management has set out plans to reduce level of non-performing loans on the back of strengthened risk management capabilities and implementation of a more conservative risk culture.
Moody’s would consider upgrading the rating if management implements initiatives to strengthen the fundamental operations of the group and realisation of its diversification potential.
The reduction in double leverage could prompt Moody’s to restore the outlook to stable.
Moody’s would consider downgrading the rating if ETI’s asset quality or capital metrics further deteriorate, or if double leverage fails to decline as per management’s plans.