Ghana: Fitch affirms UBA, GTBank at ‘B-‘ on sovereign downgrade to ‘CC’
Fitch Ratings has affirmed Guaranty Trust Bank (Ghana) Limited’s (GTB Ghana) and United Bank for Africa (Ghana) Limited’s (UBA Ghana) Long-Term Issuer Default Ratings (IDRs) at ‘B-‘ with a Stable Outlook.
Fitch has also affirmed their Shareholder Support Ratings (SSR) at ‘b-‘ and Viability Ratings (VR) at ‘ccc’.
The rating actions follow the downgrade of Ghana’s Long-Term IDRs to ‘CC’ from ‘CCC’ on 23 September 2022.
The affirmation of the VRs at ‘ccc’ reflects our view that, as per Fitch’s definition, failure is a real possibility in the context of a likely restructuring of Ghana’s local- and foreign-currency debt but not a probable outcome as potential losses are expected to be tolerable due to the banks’ large capital buffers.
A restructuring involving material losses being imposed on sovereign creditors would have a significant effect on the banks’ solvency given their large holdings of sovereign fixed-income securities relative to their common equity Tier 1 (CET1) capital (GTB Ghana: 189%; UBA Ghana: 325% at end-1H22).
Solvency pressure stemming from a sovereign restructuring will be compounded by heightened market risks and the effect of weak operating conditions on private-sector credit quality.
KEY RATING DRIVERS
The banks’ Long-Term IDRs are driven by a limited probability of extraordinary support from their Nigeria-based parents, Guaranty Trust Bank Limited (GTB: B/Stable) and United Bank for Africa PLC (UBA: B/Stable), as expressed by their SSRs of ‘b-‘. The Stable Outlook on the Long-Term IDRs reflects those on their parents’ Long-Term IDRs. GTB Ghana’s and UBA Ghana’s Long-Term IDRs are at the same level as Ghana’s Country Ceiling of ‘B-‘, which captures Fitch’s view of transfer and convertibility risk (T&C) within Ghana.
Shareholder Support: The SSRs are one notch below the parents’ Long-Term IDRs, reflecting the view that the Ghanaian banks are strategically important but not core subsidiaries of their respective groups. We believe the parents have a high propensity to provide support, if required, in a sovereign default, to preserve their operations in Ghana. This reflects the attractiveness and contribution of the Ghanaian market to their pan-African strategies and the reputational implications of a subsidiary default.
However, the Nigerian parents’ ability to provide support is conditioned by their own creditworthiness, as expressed by their respective Long-Term IDRs.
Sovereign Restructuring Poses Solvency Risks: The banks have high CET1 capital ratios (GTB Ghana: 43%; UBA Ghana: 23% at end-1H22) and have headroom to absorb material losses on sovereign securities, in particular GTB Ghana.
Fitch expects that losses imposed on creditors as part of a restructuring of sovereign debt would not be of a magnitude so as to undermine the solvency of the banking system. GTB Ghana and UBA Ghana have stronger capitalisation than the aggregated banking system and therefore Fitch’s base case is that losses will be tolerable. However, the scale of such losses is uncertain and therefore failure remains a real possibility.
Healthy Liquidity Position: The banks are almost entirely funded by customer deposits (GTB Ghana: 100%, UBA Ghana: 99% of total funding at end-1H22) and have limited reliance on external deposit funding. Deposit structures are favourable, comprising a high percentage of current and savings accounts that support stability.
Foreign-currency liquid assets mainly comprise placements with investment-grade international banks, which cover a healthy percentage of foreign-currency customer deposits (GTB Ghana: 45%, UBA Ghana: 40% at end-2021). Local-currency liquid assets mainly comprise local-currency sovereign securities but Fitch’s expectation is that these securities will remain eligible for repo with the Bank of Ghana during a potential restructuring.
Weak Operating Conditions: Inflation increased sharply in 2022 to reach 33.9% in August as a result of higher commodity prices that have been exacerbated by exchange-rate weakness, with the Ghanaian cedi depreciating 40% against the US dollar to date, prompting the Bank of Ghana to increase the policy rate by 750bp so far this year. Fitch expects real GDP growth to slow to 4% in 2022 and 5.3% in 2023.
Problem Loans to Rise: Macroeconomic volatility will burden borrowers and lead to increased problem loans into 2023. However, loan-quality risks are mitigated by the banks’ small loan books (GTB Ghana: 28% of total assets at end-1H22; UBA Ghana: 21%), with broader asset quality being more closely aligned with sovereign creditworthiness due to large holdings of Ghanaian securities (GTB Ghana: 35% of total assets at end-1H22; UBA Ghana: 53%). Sovereign exposure is largely in local currency but both banks have moderate holdings of eurobonds.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The Long-Term IDRs would be downgraded if the SSRs are downgraded. The SSRs could be downgraded if the parents’ high propensity to support their subsidiaries weakens. The SSRs could also be downgraded if the parents’ Long-Term IDRs are downgraded or if Fitch’s perception of T&C risk increases, affecting the ability of subsidiaries to use parental support, which may be indicated by a downward revision of Ghana’s Country Ceiling.
A downgrade of the VRs would likely result from material losses that accompany a sovereign default and, coupled with loan impairment charges and market risks, significantly deplete capital buffers such that CET1 capital ratios decline markedly below the 8% minimum regulatory requirement without clear prospects to recover or require prolonged regulatory forbearance of an extraordinary nature.
A significant tightening in foreign- or local-currency liquidity triggered by large deposit outflows could lead to VR downgrades.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the Long-Term IDRs of GTB Ghana and UBA Ghana would require an upgrade of their respective SSRs or multi-notch upgrade of their VRs.
An upgrade of the SSRs would require an upgrade of the parents’ Long-Term IDRs and an upward revision of Ghana’s Country Ceiling, which in turn would require a multi-notch sovereign upgrade.
An upgrade of the VRs may follow a sovereign restructuring if it results in just moderate losses without putting pressure on the banks’ solvency or if in Fitch’s view, the sovereign default becomes less likely, with the banks maintaining reasonable financial metrics.
VR ADJUSTMENTS
The operating environment scores of ‘ccc’ are below the ‘b’ category implied scores due to the following adjustment reason: sovereign rating (negative)
The business profile scores of ‘ccc+’ are below the ‘b’ category implied scores due to the following adjustment reason: business model (negative)
GTB Ghana’s and UBA Ghana’s earnings and profitability score of ‘b-‘ and ‘ccc+’, respectively, are below the ‘bb’ category implied scores due to the following adjustment reason: historical and future metrics (negative)
GTB Ghana’s and UBA Ghana’s capitalisation and leverage scores of ‘ccc+’ and ‘ccc’, respectively, are below the ‘bb’ category implied scores due to the following adjustment reason: risk profile and business model (negative)
The funding and liquidity scores of ‘b-‘ are below the ‘bb’ category implied scores due to the following adjustment reason: liquidity coverage (negative)