Fitch Ratings has assigned Ecobank Ghana Limited (EGH) a Long-Term Issuer Default Rating (IDR) of ‘B-‘ with a Negative Outlook and Viability Rating (VR) of ‘b-‘.

According to Fitch Ratings, the Long-Term Issuer Default Ratings of Ecobank Ghana Limited are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR) of ‘b-‘.

The rating agency noted that Ecobank Ghana Limited’s long-term IDR and VR are constrained by Ghana’s Long-Term IDR of ‘B-‘ as the bank does not meet Fitch’s criteria to be rated above the sovereign on a standalone basis.

Fitch believes that Ecobank Ghana Limited is unlikely to remain solvent in the event of a sovereign default, due to the concentration of its activities within Ghana. The agency also pointed out the bank’s material reliance on sovereign-derived income and high exposure to the sovereign relative to capital, primarily through government securities (447% of common equity Tier 1 (CET1) capital at end-9M21). Meanwhile, the Negative Outlook on EGH’s Long-Term IDR mirrors that on Ghana’s Long-Term IDR.

Ecobank Ghana Limited is Ghana’s second-largest bank, representing 10% of Ghanaian banking-system assets at end-9M21, and its franchise benefits from being a subsidiary of Ecobank Transnational Incorporated (ETI; B-/Stable); a pan-African banking group with operations spanning 33 countries across sub-Saharan Africa (SSA).

Risk Profile Fairly Strong

EGH’s risk profile is fairly strong within the context of the Ghanaian operating environment, with corporate loans representing 67% of net loans at end-2020. Single-borrower credit concentration is moderate, with the bank’s 20-largest loans representing 50% of gross loans and 137% of CET1 capital at end-3M21. Sovereign exposure through government securities is high (43% of total assets at end-9M21). Sovereign exposure further stems from lending to the public sector and state-owned enterprises (over 20% of lending).

Ecobank Ghana Limited’s impaired loans (Stage 3 loans under IFRS 9) ratio (6.4% at end-9M21) is significantly lower than that of the Ghanaian banking-sector average (15.2% at end-2021). EGH’s impaired loans ratio has declined significantly from 16.8% at end-2018, as a result of the government-led resolution of Ghana’s energy-sector debt problem and, more recently, recoveries and write-offs. Specific loan loss allowance coverage of impaired loans was 95% at end-9M21.

The share of loans restructured as a result of the pandemic declined to around 2% at end-1H21 from 8% at end-2020. Our asset-quality assessment also considers the bank’s small loan book (28% of total assets at end-9M21) and large holdings of Ghanaian government securities.

Profitability Strong

The Bank’s profitability is strong, as indicated by operating returns on risk-weighted assets averaging 7.2% over the past four years. This is underpinned by Ghana’s high interest-rate environment, low cost of funding and healthy non-interest income. Reliance on interest income on government securities is material (33% of interest income in 2020), reflecting EGH’s asset composition.

Ecobank Ghana Limited’s common equity Tier 1 (CET1) capital ratio (16.1% at end-9M21) is fairly high, reflecting a balance sheet that exhibits low leverage. Pre-impairment operating profit, which equalled 19% of average gross loans in 2020, provides a large buffer to absorb higher loan impairment charges if asset quality deteriorates without putting capital under pressure.

Fitch expects EGH’s CET1 capital ratio to remain high, supported by strong profitability and the bank’s intention to maintain high capital buffers. However, capitalisation would come under pressure from a sovereign default, due to EGH’s significant exposure to the sovereign through securities and lending.

However, one of the factors that could, individually or collectively, lead to negative rating action/downgrade are: A sovereign downgrade would result in a downgrade of the Long-Term IDR and VR, given that the bank does not meet Fitch’s criteria to be rated above the sovereign

Another factor is material deterioration in asset quality that exerts significant downward pressure on capitalisation and leverage may result in a VR downgrade if not compensated by new equity injections