FG’s High Debt Exposure Forces US-Based Rating Agency To Downgrade UBA, First Bank, Seven Others

The debt exposure of the Federal Government has forced Moody’s Investors to downgrade the rating of nine Nigerian banks.

The US-based rating agency downgraded long-term deposit ratings, issuer ratings as well as the senior unsecured debt ratings from B3 to Caa1.

THE WHISTLER can report that the affected banks are Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Limited, Union Bank of Nigeria Plc, Fidelity Bank Plc, FCMB (First City Monument Bank) Limited and Sterling Bank Plc.

Moody’s rates debt obligation as Caa 1, meaning that such obligations are adjudged to be speculative of poor standing and are subject to very high credit risk.

A report by Moody’s obtained by THE WHISTLER said the rating actions follow its downgrade on 27 January 2023 of the long-term issuer rating of the Federal Government to Caa1 from B3.

In the report, it stated that “Moody’s downgrade of the long-term ratings of nine Nigerian banks reflects a combination of (a) the weakening operating environment, as captured by Moody’s lowering of its Macro Profile for Nigeria to Very Weak from Very Weak+; and (b) the interlinkages between the sovereign’s weakened creditworthiness (as indicated by the downgrade of the sovereign rating to Caa1 from B3) and the banks’ balance sheets, given the banks’ significant holdings of sovereign debt securities.”

The revised Macro Profile for Nigeria reflects Moody’s expectation that depressed and uncertain oil production, capital outflows amid flight to quality and then government’s constrained access to external funding will likely continue to weigh on Nigeria’s external position in 2023.

The revised Macro Profile also captures the risks that foreign currency shortages in the country pose to the liquidity, capitalization and asset quality of Nigerian banks.

Moody’s said the rated banks have significant exposure to FG’s debt.

Moody’s noted that the banks have a large portion of their assets located in the country.

It said, “Rated Nigerian banks have significant direct and indirect exposure to the Nigerian sovereign, with a significant portion of their assets located in the country, and sovereign debt holdings representing 28 per cent of their aggregate total assets as of June 2022.

“Government exposure links the banks’ credit profiles with the sovereign’s, whose rating was downgraded on 27 January 2023, to reflect Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate.

“The government faces wide-ranging fiscal pressure while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and social challenges.”

Moody’s explained that it believes that the Nigerian Government would, “support the banks’ senior liabilities in case of need, noting that this does not benefit the ratings as the government itself is rated no higher than the bank’s BCA.

The rating agency also said the rating could be upgraded if there are improvements in Nigeria’s credit profile.

It added, “The ratings could be upgraded if there was a material improvement in the sovereign’s credit profile and in the local operating environment.

“The ratings could be downgraded if there was a deterioration in the sovereign’s credit profile, and/or a significant weakening in the operating environment in Nigeria, and/or a material deterioration in the banks’ solvency and liquidity.”