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Ecobank Nigeria Limited’s capital adequacy levels declined to about 8.0% while the prudential capital ratio fell short of the regulatory requirement of 10% as at 30 June 2024.
The decline was due mainly to the impact of foreign currency translation on risk-weighted assets; as well as lower group support uplift from the parent entity – Ecobank Transnational Incorporated (ETI), according to GCR Ratings
GCR also downgraded Ecobank Nigeria Limited’s national scale long and short-term issuer ratings to BB(NG) and B(NG) from BBB-(NG) and A3(NG) respectively.
“According to management, no new foreign currency (FCY) loans will be advanced, while Naira lending will be significantly curtailed,” GCR said.
While ETI has remained supportive to the bank mainly via funding, and purchasing of problem loans, GCR says that the capacity for future support is relatively weaker.
“This is because the parent faces increased double leverage risk, as well as tighter global funding conditions which potentially limits its ability to fundraise. Hence the bank is seeking AT1 from other sources in a bid to diversify funding sources and shore up capital,” GCR said.
The bank’s risk position (as of September 2024) is also considerably weaker due mainly to the bloating effect of weaker Naira on stage 2 and 3 loans relative to gross loans.
Stage 2 loans increased to 66.0% of gross loans (from 42.4% in 2023) and stage 3 loans increased to 9.8% (from 9.1% in 2023).
Loan loss reserves also declined to 28.1% of stage 3 loans from 49.3% in 2023 and 76.4% in 2022.
GCR expects asset quality to remain pressured over the outlook period owing to the impact of macroeconomic factors including (1) costly foreign exchange (USD), (2) high interest rates, and (3) high inflation.
To mitigate asset quality risk going forward, the bank will not create new FCY loans, while Naira loans will only be advanced to existing high-quality obligors. The bank has also begun to restructure some FCY loans by converting them to Naira.
In September, the bank received USD5 million in tier 1 capital and USD5 million in additional tier 1 capital (AT1) from ETI to help remedy the deficit capital position, subject to regulatory approval.
“We expect the GCR capital ratio to remain low at about 8% to 10% over the next 12 months as the bank continues to seek more AT1 to boost the capital position,” GCR Ratings said.
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