Fitch downgrades Nigeria's Diamond Bank ratings
Fitch Ratings has downgraded Diamond Bank Plc's Long-Term Issuer Default Rating (IDR) to 'CCC' from 'B-' and Short-Term IDR to 'C' from 'B'.
Diamond's National Long-Term Rating has been downgraded to 'B(nga)' from 'BB+(nga)'. A full list of rating actions is at the end of this rating action commentary.
The two-notch downgrade of Diamond's Long-Term IDR reflects uncertainty over its solvency and liquidity in view of very weak asset quality, highly vulnerable capital position as well as tight foreign currency (FC) liquidity ahead of an upcoming maturing USD200 million Eurobond in May 2019.
The bank has some contingency plans, such as the sale of its UK subsidiary, but execution may be challenging, especially considering the recent resignation of four board members.
Stage 3 loans under IFRS 9, including past due not impaired, which better captures asset quality in our view, accounted for a very large of 37% of gross loans at end-1H18, compared with a reported impaired loans ratio (under IAS39) of 13% for the same period.
Diamond's stage 2 loans were a further 23% of gross loans, mostly comprising restructured loans. Diamond has the highest share of problem loans (total stage 2 and stage 3 loans as a proportion of gross loans) among Nigerian rated banks. Loan loss allowance cover is very low at 19% of stage 3 loans.
“We view Diamond's capital buffers as limited, given very weak asset quality, despite a relatively high Fitch Core Capital (FCC) ratio of 17.5% at end-1H18. In our view capital remains highly vulnerable given the bank's low loan loss allowances. Higher reserve coverage would erode considerably the bank's capital base. Unreserved stage 3 loans were 110% of FCC at end-1H18,” the rating agency said in a statement.
Diamond's FC liquidity improved in 2017, in line with easing FC liquidity conditions in Nigeria. However, FC liquidity remains tight, as Diamond's FC loans/customer deposits ratio reached 180% at end-1H18.
The bank has a number of large bullet repayments due in the short term, including its USD200 million Eurobond maturing in May 2019, USD100 million from Afrexim due in March 2019, and USD70 million from the International Finance Corporation due in July 2019.
The bank had about USD300 million of liquid assets held as unrestricted cash and cash equivalents and loans to foreign banks at end-1H18.
“We understand that the bank aims to negotiate the refinancing of international financial institution funding, while the improved cash flows from the oil loan book and the disposal of its subsidiary in the UK will be the main contributors to redeeming the Eurobond. However, the refinancing has not yet been agreed, while subsidiary disposal has yet to be approved by the Prudential Regulation Authority in the UK and cash flows from the troubled oil sector are uncertain. Therefore we see significant execution risk with this plan. Although FC supply has improved, we do not expect Diamond to be able to swap significant volumes of local currency to repay foreign currency obligations,” the statement further read.
