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GTB, Access Bank Face Credit Risks From Regional Expansion – Fitch

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Nigerian lenders like Guaranty Trust Bank, Access Bank and United Bank for Africa (UBA) will face near-term execution and credit risks from their presence in other Sub-Saharan African (SSA) markets, depending on the degree of operating environment difficulty and underlying sovereign ratings of these markets.

However, longer-term, increased geographic diversification may support banks’ business profiles and growth prospects and financial performance stability, Fitch Ratings says.

Hampered by regulatory intervention and domestic country risks, large Nigerian banks are transitioning into regional financial services providers by leveraging their developed domestic business models and franchises, supported by enhanced governance practices and risk management capabilities.

Barriers to entry and competition from incumbents in new, mostly frontier, markets are relatively low and the exits of long-established international banks from the region provide significant growth opportunities.

 “We believe Nigerian banks’ expansion strategies, which include greenfield and M&A investments, are credible. United Bank for Africa’s (UBA) and, to a lesser extent, Guaranty Trust Holding Company Plc’s (GTCO) strategies are to establish fully-fledged banking subsidiaries, weighted towards corporate banking and treasury,” Fitch said in a report released Wednesday February 22.

UBA has by far the largest regional presence, with 33% of Assets and 42% of Operating Income generated outside of Nigeria, mostly in Western Africa.

FBN Holdings Plc (FBNH) and Zenith Bank Plc’s focus is also mainly on corporate banking, which is highly competitive.

Nigerian banks also see significant opportunities in retail banking.

Access, with growth fueled by M&A activity, is focused on both retail and corporate banking. Access is ambitiously targeting a 30% contribution to gross revenues from its regional operations in the medium term.

Regional expansion typically involves setting up banking and non-banking subsidiaries.

The Central Bank of Nigeria (CBN) requires banks’ non-banking subsidiaries to be held separately under group holding companies.

Non-banking subsidiaries offer diversified products including payments, insurance and pension funds which have significant upside potential. Despite the global economic slowdown, SSA GDP is estimated to grow by around 4% in 2023 compared to global growth of just 1.4%.

Opportunities for banking and financial services can be significant, according to Fitch, with African countries having large, young and underbanked populations.

To tap the retail segment in particular, Nigerian banks will utilize proven digital offerings to acquire market share, reduce operating expenses and increase investment returns.

Nigerian banks with sizeable exposures outside their home market can be negatively affected by exposures to low-rated countries, such as the Republic of Congo (‘CCC+’), Mozambique (‘CCC+’), Ghana (RD) and Zambia (RD), Fitch said.

However, the operating environment (OE) score can be supported by exposure to higher rated OEs, such as Cote d’Ivoire, South Africa and Namibia (all rated ‘BB-’).

Banks’ risk profile scores can be negatively affected by market risks, especially FX risk, according to Fitch, with regional expansion bringing significant operational risks and requiring robust processes and systems to mitigate human error, fraud and cyber related risks.

Nigerian banks typically lend to the government or invest in government securities in countries where they have a footprint, making subsidiaries’ creditworthiness closely linked with domestic sovereigns.

The credit profiles of the latter are however very weak in a number of African countries.

“Regional expansion for Nigerian banks may benefit profitability and internal capital generation, with increased risk-weighted assets usually tempered by zero-risk weighting for government exposures. Conversely, uncontrolled growth may exert near-term pressure on capital. Regional subsidiaries that gather low-cost, local-currency and US-dollar denominated deposits can help diversify the parent group’s funding base and lower overall funding costs. Subsidiaries can also support the groups’ liquidity when USD funding is fungible,” Fitch said.

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