Moody’s Investors Service has assigned first-time ratings of Ba3 to the Bank of Industry (BoI), while affirming the development finance institution’s rating as stable.
According to Moody’s, the ratings are underpinned by a b2 standalone credit profile and two notches of uplift due to Moody’s government support assumptions.
The rating agency explained that Bank of Industry’s b2 standalone profile reflects its robust capital buffers, with equity to assets ratio of 30 per cent as of September 2015; a stable liability structure made up of long-term funding at concessional rates; and the tangible improvements to the bank’s governance and risk positioning in recent years.
In its Global Credit Research report, Moody’s noted that the Bank of Industry’s reported nonperforming loans ratio (NPLs) is relatively low at 4.6% as of November 2015 and compares favourably to development bank peers globally.
“Low NPLs are partly explained by the exposures relating to the CBN intervention fund, which are guaranteed by commercial banks and, as such, have generated close to zero NPLs as Bank of Industry exercises the guarantee immediately after any of these loans become delinquent.
“That said, the ratings currently assigned to Bank of Industry take into account our expectation of a higher NPL level (between 5 and 10 per cent of total loans) over the next two years, as we expect asset quality to come under pressure as the bank increases its loan exposure within Nigeria’s challenging operating environment.
“Bank of Industry plans to double its total loan book size over the next four years and to increase its MSME portfolio by 14 times its currently modest size.
This MSME target corresponds to an annual growth rate of 93 per cent, albeit from a very low base (four per cent of total portfolio). Bank of Industry projects that about half of new loans that will be extended in the future will be guaranteed by a commercial bank”, it added.
Commenting on the bank’s credit profile, Moody’s stated that as of September 2015, tangible common equity as a percentage of total assets stood at 30 per cent, up from 26 per cent in 2014, which is substantially stronger than similarly-rated global peers.
“Although we expect Bank of Industry’s capitalization to decline going forward due to its planned loan book growth of about 20 per cent annually, we anticipate that tangible common equity as a percentage of total assets will remain above 20 per cent for the next 12 to 18 months, which will still leave the bank with a robust capital cushion that compares favourably to peers internationally.
“These strengths are balanced against Nigeria’s currently challenging operating environment; and our projection that asset quality will be increasingly pressured given the rapid loan growth strategy that the bank is pursuing, particularly in the micro, small and medium-sized enterprises (MSMEs) segment.
Which may expose the bank to riskier assets.
“We view Bank of Industry’s access to concessional wholesale funding as strength, given that most of the bank’s funding is long term and from the Central Bank of Nigeria (CBN) in the form of a zero-coupon bond of $535 million maturing in 2025, with the remainder coming from legacy, inexpensive, bilateral loans contracted before 2011. Going forward, Bank of Industry intends to increase its leverage primarily in the form of long-term bilateral loans from supranational organisations”, Moody’s projected.
Speaking on the rating, the Bank’s Managing Director, Rasheed Olaoluwa, “the positive rating is an endorsement of our on-going transformation project at BoI, and an affirmation of our strategic intent of adopting global best practices in all aspects of our operations. It further affirms an improvement in earlier ratings of the development finance institution.
He added: “we are determined to make increasing impact in our focus sectors and to continue to set the pace as Nigeria’s leading development bank”.
To improve its rating, Moody’s noted that an upgrade in the bank’s rating could be triggered by improvements in the operating environment combined with an upgrade of Nigeria’s sovereign rating (Ba3, stable) given that the sovereign rating currently acts as a constraint on Bank of Industry’s rating, adding that Independently from long-term ratings, the bank’s standalone profile of b2 could be increased over time if the bank’s asset quality track record shows greater resilience than assumed in the ratings.