Afreximbank credit rating upgraded to ‘BBB’
Credit rating of Pan-African multilateral trade finance institution, Afreximbank, has been upgraded to ‘BBB’ with a stable outlook from the previous credit rating of ‘BBB-‘.
According to credit rating agency, Fitch Ratings, the upgrade of Afreximbank’s ratings reflects a strengthening in the bank’s standalone credit profile (SCP).
Improvement in the bank’s SCP follows Fitch Ratings revision of its assessment of the bank’s business profile to ‘moderate’ from ‘high risk’.
“Afreximbank has strengthened its institutional role and raised its profile as the main multilateral development bank focused on supporting the public and private sectors on the African Continent,” said Fitch Ratings.
The upgrade of Afreximbank’s credit rating to ‘BBB’ imply good credit quality and indicate that expectations of default risk are currently low.
It further implies that, the capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.
Read further details of Fitch’s rating action below:
Increased Policy Importance: The improvement in the bank’s business profile follows Fitch’s revised assessment of Afreximbank’s policy importance. This is primarily underpinned by the recent large capital increase, which in Fitch’s view, highlights the increased importance of the bank for its shareholders. The increasing number of key mandates given to the bank by the African Union (e.g. to implement the health response to the Covid-19 crisis, or more recently to support access to grains and fertilisers in the context of the Russia-Ukraine conflict) is further evidence of the bank’s rising profile.
SCP Drives Ratings: Afreximbank’s ratings are driven by its SCP, reflecting the lower of the solvency and liquidity assessments, and the ‘high risk’ business environment in which the bank operates. The solvency assessment of ‘a-‘ balances the bank’s ‘strong’ capitalisation and ‘moderate’ risk. The ‘high risk’ business environment now leads to a two-notch negative adjustment to the lower of solvency (a-) and liquidity (a) assessments versus a three-notch adjustment previously.
Strong Capitalisation: Fitch’s capitalisation assessment takes into account the bank’s ‘strong’ equity to assets and guarantees ratio (E/A; 17% at end-2021), the ‘moderate’ usable capital to risk-weighted assets (FRA; 18%) ratio and the ‘excellent’ internal capital generation (ICG). Fitch expects the E/A and FRA ratios to remain broadly unchanged over the forecast period to 2024. Fitch’s projections assume a 12% yoy growth in the banking operations and capital injections under the general capital increase approved by Afreximbank’s board of directors in June 2021 (totalling USD2.6 billion in paid-in capital, of which USD1,053 million has been already paid).
Credit Risk Mitigated: The average rating of loans and guarantees before accounting for credit risk mitigants remained stable at ‘B-‘ as of end-2021. The low credit quality of the portfolio reflects Afreximbank’s exposure to non-sovereign entities (83% of total loans), whose credit quality are deemed very weak as per Fitch’s assessment, and sovereign borrowers with an average rating of ‘B-‘. Fitch’s credit risk assessment also takes into account a high degree of loan collateralisation (87% of total loans at end-2021), including cash collaterals (covering 28% of the loans) and credit insurance (9%) from ‘A-‘-‘AA’ rated insurers, which provide an uplift of three notches above the average rating of loans to ‘BB-‘.
Other Risks ‘Low’: Concentration risk is ‘low’, with the bank’s five largest exposures accounting for 26% of banking portfolio at end-2021. However, geographical concentration is high. More than half of exposures were to entities based in Egypt (B+/Stable) and Nigeria (B/Stable), the bank’s two largest shareholders, as of end-2021. Afreximbank uses derivative instruments to manage FX and interest rate risks. Equity participation is expected to remain below 2% of banking operations. The ‘moderate’ risk management policies primarily reflects the use of credit risk mitigants that have helped maintain a relatively low non-performing loan (NPL) ratio (3.3% at end-2021), despite the high-risk environment that the bank operates in.
Strengthening Liquidity Profile: Fitch has revised its assessment of Afreximbank’s liquidity profile to ‘a’ from ‘a-‘ previously. The revision results from the ongoing improvement in the quality of liquid assets. The share of treasury assets rated ‘AA’-‘AAA’ increased to 44% (above the ‘strong’ threshold), from 39% at end-2020 and 21% at end-2018. The liquidity assessment also accounts for the ‘moderate’ size of liquidity buffer (defined as liquid assets-to-short-term debt at 1.0x at end-2021). The bank’s liquidity profile is enhanced by its access to capital markets and other alternative liquidity sources, reflecting diversified funding sources, which include credit lines (USD3.4 billion of which USD1.8 billion was committed at end-2021), deposits, and short duration of the loan portfolio.
Moderate Shareholder Support: Fitch assesses shareholders’ capacity to support Afreximbank at ‘bb’, based on the average rating of key shareholders (BB-) accounting for more than 50% of the bank capital. Credit risk mitigants on callable capital (covering 63% of USD1.8 billion) enhance the support capacity by one notch, to ‘bb’. The support assessment also reflects the ‘strong’ propensity of the shareholders to support the bank, which has been consistently demonstrated by ongoing capital injections and dividend reinvestments.
Liquidity Supports Short-Term Rating: Fitch has upgraded Afreximbank’s Short-Term IDR to ‘F2’ from ‘F3’. ‘F2’ is the higher option at the ‘BBB’ cusp point on Fitch’s Long-Term IDR correspondence table. The choice of the higher option results from Afreximbank’s liquidity assessment of ‘a’, which is higher than the minimum ‘bbb+’ liquidity assessment at which the higher option would apply at the ‘BBB’ cusp point.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Solvency (Capitalisation): Material improvement in the capitalisation assessment. This would be the case if the bank was operating with lower leverage and stronger asset quality leading to an E/A ratio above 25% or a FRA ratio above 25% over the medium term.
Solvency (Risks): Strengthening of the bank’s risk profile as a result of improvement in the credit quality of the loans and guarantees and sustainable decline in NPLs/Stage 3 loans below 3% of gross loans over the medium term. Reduction in geographical concentration, supported by the introduction of more conservative country limits, could also support our assessment of risk.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Solvency: Weakening in our assessment of solvency as the result of a lower-than-expected capital increase, higher-than-expected loan growth and/or deterioration in asset quality and loan performance, for example if the NPL ratio increased above 6%.
Liquidity: Significant deterioration in the liquidity assessment, which could result from a combination of weaker coverage of short-term debt by liquid assets and weakening in the credit quality of treasury assets (e.g. if the share of treasury assets rated ‘AAA’-‘AA’ was falling below 40% of the total). Deterioration in access to capital markets and other sources of liquidity could also lead to a downward revision of the bank’s liquidity assessment.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years.
The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.