Fitch: Nigeria’s sovereign ratings may impact upgrade of banks

Fitch Ratings has revealed that the Long-Term Issuer Default Ratings of seven Nigerian banks and two bank holding companies could potentially see an upgrade if Nigeria's sovereign Long-Term Issuer Default Ratings were to be upgraded and the entities can maintain stable financial profiles. Jamal El Mellali, Director of Financial Institutions – Banks at Fitch Ratings, discussed this report with CNBC Africa, shedding light on the sensitivity of Nigerian banks' ratings to the sovereign and operating environment. According to El Mellali, the ratings of the largest banks in Nigeria are currently at B-minus with a positive outlook, including Access, Zenith, UBA, FBA, GT Co, Fidelity, and the Bank of Industry. These ratings are closely tied to the sovereign rating and outlook due to the significant exposure of banks to the sovereign and the central bank, ranging from almost three times equity at GT Co to more than five times at Access. As a result, any potential upgrade in the sovereign rating could lead to upgrades for these banks. El Mellali also delved into the dynamics surrounding state-backed financial institutions like the Bank of Industry and Tier 2 banks. He highlighted that an upgrade in the sovereign rating would likely result in an upgrade for the Bank of Industry due to its close links to the state and its role in driving Nigeria's economic development. However, for Tier 2 banks, further strengthening of franchises, profitability, and capitalization would be necessary to support an upgrade. The conversation then shifted to capitalization requirements imposed by the Central Bank of Nigeria, with new minimum padding capital requirements prompting capital-raising activities among banks. Four banks, including Access, Zenith, Ecobank, and Jaiz, have already achieved compliance, while others are expected to meet the deadline by 1Q26 through equity capital injections, M&A activities, or potentially downgrading their licenses. Despite a challenging regulatory environment marked by punitive measures such as increased cash reserve ratio requirements and windfall taxes, Nigerian banks have showcased resilience and profitability. The sector has weathered the regulatory changes, with banks reporting strong financial performance, including doubled net income and robust return on equity figures. This resilience has bolstered confidence in the banking sector's ability to navigate reforms and challenges. In conclusion, El Mellali emphasized the sector's resilience to regulatory pressures, attributing it to banks' profitability and adaptability. While risks and challenges persist, the banking sector in Nigeria appears well-positioned to withstand regulatory changes and potential reforms, signaling a positive outlook for the industry.