Last week, Standard & Poor’s Ratings Services (S&P) revised its outlook on Nigeria’s three largest banks – GT Bank, First Bank of Nigeria and Zenith Bank – to ‘positive’ from ‘stable’, even as it affirmed its long- and short-term counterparty credit ratings on all three banks at ‘B+/B’.
Due to the Federal Government’s reform initiatives, S&P had revised the outlook on Nigeria to ‘positive’ from ‘stable’, and had affirmed its long- and short-term sovereign credit ratings on the economy at ‘B+/B’, on 29 December 2011.
A statement posted on the international ratings agency’s website explains that the decision to revise the outlook on the three commercial banks was largely a result of the revision on the economy at large. However, the statement also highlights that the rating agency had raised its national scale ratings on the three banks to ‘ngA+/ngA-1′ from ‘ngA/ngA-1′, reflecting Nigeria’s positive economic prospects and the expected effect on the banks’ financial performances.
It explained: “The positive outlook on the three banks largely reflect the banks’ Stand-Alone Credit Profiles (SACPs) and the outlook on the sovereign, and indicate at least a one-in three likelihood of the banks being upgraded if the government’s reform initiatives progress and help support economic growth. Potential upgrades are conditional upon the maintenance of the banks’ SACPs at least at ‘bb-‘, with no material weakening of their financial performance over the short- to medium-term.”
S&P said that under its criteria for banks – the Banking Industry Country Risk Assessment (BICRA), used in determining a bank’s anchor, the three financial institutions were above the sovereign credit ratings. The ratings agency also added that if Nigeria’s reform initiatives supported positive economic growth, built stronger buffers against the country’s dependence on petroleum revenues, and reduced pressure on the exchange rate, then it may lead to an upgrade of the country’s sovereign rating and a more favourable operating environment for the banks.
The report by S&P further reiterates our positive outlook on GT Bank, First Bank of Nigeria and Zenith Bank. With the Nigerian banking crisis having been resolved, we believe that the negative sentiment, of which these three banks ‘unfairly’ suffered, will begin to ease, allowing their share prices to rerate. Currently trading on single digit PERs and PBVs of about 1.0x, we believe the banking stocks offer investors quality exposure in one of the world’s most promising economies.
Imara is an investment banking and asset management group renowned for its knowledge of African markets.