GTBank Ghana rating affirmed at ‘B-‘ with 36% asset exposure…
Credit ratings agency Fitch Ratings, has affirmed GTBank Ghana’s rating at ‘B-‘ but warns the bank stands the risk of facing challenges in the event of a sovereign default scenario.
According to Fitch Ratings, this is mainly because of its reliance on sovereign-derived income and high exposure to sovereign debt.
At least, 36% of the bank’s total assets as at the end of the first quarter of this year are engulfed in sovereign debt.
Ghana’s public debt valued at GHS 391.9bn currently stands at 78% of GDP, placing Ghana at risk of becoming a high debt distressed country.
The assertion by Fitch Ratings is contained in a recent credit rating action on GTBank, in which the rating agency affirmed the bank’s Limited’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook as well as its viability rating (VR) at ‘b-‘.
The recent rating action by Fitch follows its downgrade of GTB Ghana Limited’s Long-Term Issuer Default Rating (IDR) to ‘B-‘ from ‘B’ and viability rating (VR) to ‘b-‘ from ‘b’ in February this year.
According to Fitch Ratings, GTB Ghana’s Long-Term IDR is at the same level as Ghana’s Country Ceiling of ‘B-‘, which captures Fitch’s view of transfer and convertibility risk within Ghana.
“GTB Ghana is unlikely to remain solvent in a sovereign default scenario due to the concentration of its operations within Ghana, its reliance on sovereign-derived income, and high exposure to the sovereign (36% of total assets at end-1Q22) relative to capital (174% of the CET1 common equity Tier 1 (CET1) capital at end-1Q22). GTB Ghana therefore does not meet Fitch’s criteria to be rated above the sovereign on a standalone basis,” said Fitch Ratings.
Peruse details of rating action below:
KEY RATING DRIVERS
Shareholder Support Drives IDRs: GTB Ghana’s Long-Term IDR is driven by potential support from its Nigeria-based parent Guaranty Trust Bank Limited (GTB Limited; B/Stable), as expressed by its Shareholder Support Rating (SSR) of ‘b-‘.
The Stable Outlook reflects that on GTB Limited’s Long-Term IDR. GTB Ghana’s Long-Term IDR is at the same level as Ghana’s Country Ceiling of ‘B-‘, which captures Fitch’s view of transfer and convertibility risk within Ghana.
Shareholder Support: Fitch considers GTB Limited to have a high propensity to provide support given GTB Ghana’s importance to the group’s pan-African strategy and its substantial contribution to group net income (13% in 2021). It also considers the 98% ownership, common branding, strong performance record and high level of management and operational integration between GTB Ghana and the wider group. However, GTB Limited’s ability to provide support is limited by its creditworthiness, as expressed by its Long-Term IDR.
Sovereign Constrains VR: GTB Ghana is unlikely to remain solvent in a sovereign default scenario due to the concentration of its operations within Ghana, its reliance on sovereign-derived income, and high exposure to the sovereign (36% of total assets at end-1Q22) relative to capital (174% of the CET1 common equity Tier 1 (CET1) capital at end-1Q22). GTB Ghana therefore does not meet Fitch’s criteria to be rated above the sovereign on a standalone basis.
Moderate Franchise: GTB Ghana represented just 3% of Ghanaian banking system assets at end-2021 but its franchise benefits from being a subsidiary of GTB. Market shares will increase moderately over the medium term as GTB Ghana pursues aggressive growth.
Aggressive Loan Growth: Extremely strong loan growth in 2020 and 2021 (85% and 56%, respectively) was largely driven by increased exposure to existing customers, which has heightened single-borrower credit concentration. However, underwriting standards remained reasonable, with new lending largely being collateralised by sovereign fixed income securities. Strong loan growth will continue in 2022 and 2023 and may lead to loan book seasoning risks.
Healthy Loan Quality: GTB Ghana’s impaired loans (Stage 3 loans under IFRS 9) ratio (2.4% at end-1Q22) is significantly lower than the banking sector average (14.4% at end-2M22). However, our asset quality assessment reflects large holdings of mainly local-currency Ghanaian government securities.
Strong Profitability: Strong earnings are underpinned by Ghana’s high interest rate environment, which supports a wide net interest margin, and strong non-interest income in the form of fees and trading income. Earnings are highly reliant on interest income from government securities (49% of total interest income in 2021). However, this reliance has decreased in recent years (from 69% in 2018) due to accelerated lending growth.
High Sovereign Exposure: GTB Ghana’s CET1 capital ratio (39.3% at end-1Q22) is high, reflecting a balance sheet that exhibits low leverage, but also supported by low risk-weighted assets density (53% at end-1Q22). However, GTB Ghana’s operations are concentrated in Ghana and holdings of Ghanaian government securities are high relative to capital, exposing GTB Ghana to a sovereign default.
Strong Liquidity Coverage: A high percentage of demand and savings accounts and a healthy share of retail deposits support funding stability. Depositor concentration is moderate. Large holdings of government securities and bank placements ensure strong liquidity.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of the Long-Term IDR would require a downgrade of the SSR of ‘b-‘ and VR of ‘b-‘.
A weakening in GTB’s ability or propensity to provide support would lead to a downgrade of the SSR. Reduced ability to support would most likely be indicated by a downgrade of GTB’s Long-Term IDR or a downward revision of Ghana’s Country Ceiling
A sovereign downgrade would result in a VR downgrade, given that GTB Ghana does not meet Fitch’s criteria to be rated above the sovereign on a standalone basis.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the Long-Term IDR would require an upgrade of the SSR or VR.
An upgrade of the SSR would require both an upgrade of GTB Limited’s Long-Term IDR and an upward revision of Ghana’s Country Ceiling.
An upgrade of the VR would require a sovereign upgrade, while maintaining reasonable financial metrics.
VR ADJUSTMENTS
The Earnings and Profitability Score of ‘b-‘ has been assigned below the ‘bb’ category implied score due to the following adjustment reason: revenue diversification (negative).
The Capitalisation and Leverage Score of ‘b-‘ has been assigned below the ‘bb’ category implied score due to the following adjustment reason: risk profile and business model (negative)
The Funding and Liquidity Score of ‘b’ has been assigned below the ‘bb’ category implied score due to the following adjustment reasons: historical and future metrics; liquidity coverage (negative)
