Fitch Ratings has revised the Outlook on Banque d’investissement et de developpement de la CEDEAO’s (EBID) Long-Term Issuer Default Rating (IDR) to Stable from Negative, and affirmed the IDR at ‘B’. Key Rating Drivers Reduced Pressure on Solvency.
The Outlook revision primarily reflects the reduction in Fitch Ratings’ solvency risk assessment due to an improvement in non-performing loans (NPLs).
The clearance of a significant portion of capital arrears by shareholders also supports the rating company’s assessment of EBID’s solvency.
EBID’s ‘B’ rating balances its ‘Strong’ capitalisation against its ‘High’ credit risk. The bank’s Standalone Credit Profile of ‘b’, results from ‘bb’ solvency and liquidity assessments, and a negative three-notch adjustment to reflect the bank’s ‘High Risk’ business environment.
Clearance of Arrears Supports Capital:
In 2021, EBID’s shareholders’ equity was supported by the payment of sizeable capital arrears (U.A.44million) which enhanced the bank’s capitalisation despite the marked 25% increase in the loan book.
The equity/assets ratio declined to 40% at end-2021 from 42% at end-2020, and Fitch’s risk-weighted capital (FRA) ratio was 36% as of end-2021, from 39% as of end-2020.
Fitch expects the ratios to decline in line with the growth in the loan book to a level commensurate with a ‘Strong’ assessment.
Decline in NPLs:
Bank-reported NPLs fell to 5.8% in 2021 from 7.1% in 2020, driven by the increase in the loan book and the absence of new NPLs. Fitch’s own NPL ratio fell to 9.8% at end-2021 from 15.6% at end-2020.
Fitch’s ratio accounts for the exposures that were granted payment suspension during the Covid-19 crisis and had not resumed payments at end-2021 (4% of loans). Fitch expects the NPL ratio to decline further, driven by the growth in the loan book, but to remain ‘High’ (above 6%).
High Credit risk:
The average rating of the loan book was ‘B-‘ at end-2021. About half of the loans are extended to sovereigns. EBID’s Preferred Creditor Status on its sovereign exposure leads to a one-notch uplift over the average rating of the loan book, to ‘B’. NPLs are concentrated in the non-sovereign portfolio with no sovereign NPL at end-2021.
Mali Poses Downside Risk:
The sanctions imposed to the Malian sovereign (5% of loans at end-2021) by the ECOWAS, prevent the Malian sovereign from servicing its debt to foreign creditors, including EBID. If sanctions are not lifted in the short term, this could lead to significant increase in the NPL ratio.
The bank’s non-sovereign portfolio in Mali (a further 6% of loans) has remained performing. However, the economic impact of sanctions in Mali poses downside risks to the performance of these exposures.
Improvement in Risk Management Framework:
Risk management is considered a weakness relative to peers, primarily due to the record of operations with a much higher NPL ratio. In Fitch’s view, the bank’s new strategy to lend to non-sovereign borrowers using commercial banks as intermediaries (a third of non-sovereign loans as of end-2021) should improve loan performance. The bank has maintained a diversified portfolio with the top five borrowers accounting for 35% of loans.
Weak Treasury Asset Quality:
The size and credit quality of liquidity buffers are a weakness relative to peers. To calculate its liquidity ratio, Fitch only retains 70% of treasury assets (as it excludes part of the deposits in regional commercial banks) leading to a liquid assets/short-term debt ratio of less than 100% at end-2021.
Despite an increase in deposits in OECD banks in recent years, only 40% of liquid assets were considered investment grade, the lowest across peers. The remaining 60% are short-term deposits with local banks rated in the ‘B’ category.
The bank has diversified its funding sources, but remains highly reliant on the India Exim bank, which accounted for 42% of liabilities at end-2021.
High-Risk Business Environment:
EBID’s countries of operations are low and lower-middle income countries, and are exposed to a high degree of political instability, as illustrated by three recent military coups (in Burkina Faso, Guinea and Mali).
EBID’s policy importance is affected by its limited size relative to peers, and remaining sizeable paid-in capital arrears.
Limited Shareholders’ Support:
The average rating of key shareholders was unchanged at ‘B’ at end-2021. Fitch has raised its assessment of shareholders’ propensity to support, leading to two-notch negative adjustment to the capacity to support (from three notches) to ‘CCC’. The revision reflects the sizeable arrear capital payments in 2021. Capital arrears was U.A.47million at end-2021.
