By Fitch Ratings has upheld Ecobank Transnational Incorporated’s (ETI), the parent company of Ecobank Ghana, Long-Term Issuer Default Rating (IDR) at ‘B-‘ and its Viability Rating (VR) at ‘b-‘.
The Long-Term IDR Outlook remains Stable.
Fitch noted that ETI’s IDRs are influenced by its independent credit strength, as indicated by its VR of ‘b-‘.
“As a bank holding company (BHC), ETI’s VR is notched down once from the group VR of ‘b’ due to very high common equity double leverage (end-3Q23: 177%). The group VR takes into consideration the group’s heightened exposure to foreign exchange (FX) risk and modest capital buffers for its risk profile. These are balanced against a leading pan-African franchise, strong revenue and geographical diversification, acceptable asset quality, healthy operating profitability and a strong funding and liquidity profile”, it revealed.
High vulnerability to unpredictable government actions:
Fitch stated that operating conditions are adversely affected by elevated risks to sovereign debt sustainability across sub-Saharan Africa (SSA).
“Nigeria (B-/Stable) and Ghana (Restricted Default), which are two of the group’s largest markets (end-3Q23: combined 29% of total assets), have both been downgraded in recent years, with Ghana defaulting on local- and foreign-currency (FC) debt in 1Q23. Geographical diversification mitigates sovereign risks, including high exposure to sovereigns rated ‘B-‘ and below”, it pointed out.
Significant foreign currency transition losses
The London-based firms observed that ETI faces exposure to the depreciation of sub-Saharan African (SSA) currencies due to its equity investments in subsidiaries, as its reporting currency is the US dollar. “The depreciation of SSA currencies resulted in substantial foreign currency translation losses recorded through other comprehensive income in the first nine months of 2023. These losses significantly surpassed net income, leading to a comprehensive loss of US$236 million (equivalent to 12% of total equity at the end of 2022). The impact of foreign currency translation losses on capitalization is partially offset by risk-weighted assets (RWAs) deflating in dollar terms.”
Robust operational profitability
Fitch highlighted that ETI’s strong operating profit increased notably to 4.6% of RWAs in the first nine months of 2023, up from 3.2% in 2022. This improvement was attributed to a broader net interest margin resulting from increasing interest rates.
Fitch anticipates that operating returns on RWAs will continue to be robust in 2024.
