Fitch Ratings has assigned Nigeria-based Jaiz Bank PLC (NGX:JAIZBANK) a Long-Term Issuer Default Rating (IDR) of 'B-' with a Stable Outlook and a Viability Rating (VR) of 'b-'. A full list of rating actions is detailed below.
Key Rating Drivers
The IDRs of Jaiz Bank are driven by its standalone creditworthiness, as expressed by its VR of 'b-'. The ratings reflect the concentration of the bank's operations within Nigeria's challenging operating environment, a small but evolving franchise, high credit concentrations, aggressive financing and balance-sheet growth that is expected to continue over the medium term, and financing-quality weaknesses. It also reflects healthy profitability, reasonable capitalisation and comfortable liquidity coverage.
Jaiz Bank was the first fully-fledged non-interest banking (NIB; Islamic banking) institution established in Nigeria and it has a leading Islamic finance franchise in Nigeria, representing 78% of NIB sector assets at end-2020. However, despite strong growth in recent years, its market share remains small relative to the wider banking sector, accounting for just 0.4% of sector assets at end-2020. Revenue diversification is particularly weak by domestic standards, with non-financing income representing just 8% of operating income in 9M21 as Jaiz Bank is restricted from some conventional banking activities.
Exceptionally high financing growth has prevailed in recent years (30% in 2020 and 32% in 9M21) as management has pursued an aggressive growth strategy that has flattered asset-quality metrics and creates seasoning risks. Single-borrower credit concentration is high, with the 20-largest customer exposures representing 36% of gross financing assets and 214% of Fitch Core Capital (FCC) at end-1H21. Sectoral credit concentrations are also significant, although exposure to the higher-risk upstream oil and gas segment is lower than at peers.
Jaiz Bank's impaired financing (Stage 3 financing under IFRS 9) ratio (7.8% at end-1H21) is above the banking-sector average (weighted average of 5.9%), despite having been flattered by strong financing growth. Total impairment allowance coverage of impaired financing assets (71% at end-1H21) is adequate. Stage 2 exposures (6% of gross financing at end-1H21) are moderate by domestic standards and financing under debt relief is low (3% of gross financing at end-9M21). Our asset-quality assessment also considers a high share of non-financing assets, including government sukuk (28% of total assets at end-9M21), cash and reserves at the Central Bank of Nigeria (CBN; 15%), interbank placements (7%) and commodities purchased against specific customer undertakings to buy under murabaha inventory finance contracts (7%). Net financing assets represented just 37% of total assets.
Jaiz Bank demonstrates healthy profitability, as indicated by operating returns on risk-weighted assets (RWA) of 4.7% in 9M21 (annualised). Healthy profitability is underpinned by a wide net financing margin that benefits from among the lowest cost of funding in the banking sector and has improved in recent years as a result of greater cost efficiency. Impairment charges continue to erode a high percentage of pre-impairment operating profit (43% in 9M21), despite recent improvement of the latter, reflecting pandemic-induced asset-quality weaknesses, and Fitch believes these will remain heightened in the medium term as the financing book seasons.
Jaiz Bank's FCC ratio (20.4% at end-9M21) is among the highest across the banking sector but is considered in view of a low risk-weight density (36% at end-9M21). The low risk-weight density reflects significant exposure to priority sectors and non-financing assets that are low-weighted; material cash collateralisation of financing exposures; and a 50% alpha factor (haircut to the RWA calculation specific to Islamic banks to reflect the loss absorption of profit- and loss-sharing deposits). Without the alpha factor, Jaiz Bank's FCC ratio was 18.1% at end-9M21. The bank received a NGN3.3 billion new capital injection (equivalent to 3.3% of RWAs at end-9M21) in September 2021 in the form of a private placement by an existing shareholder and Fitch understands from management that the largest shareholders remain committed to providing further capital to support its growth ambitions.
Net impaired financing assets represented a moderate 14% of FCC at end-1H21 but strong pre-impairment operating profit, which equalled 8.7% of average gross financing in 9M21 (annualised), provides a sizeable buffer to absorb impairment charges without weighing on capitalisation. Jaiz Bank's total capital adequacy ratio (CAR; 18.1% at end-9M21) has a comfortable buffer above the 10% requirement for a bank with a national license, even if adjusted for the alpha factor (16%).
The bank's funding profile is dominated by a high percentage of current and savings accounts (82% of customer deposits at end-9M21) and particularly high deposits from individuals (63%), supporting a stable funding profile and low funding costs. Depositor concentration is moderate compared with peers', with the 20-largest depositors representing 17% of customer deposits at end-1H21. Jaiz Bank's gross financing/customer deposits ratio (51% at end-9M21) is low. Liquidity coverage is comfortable in both local and foreign currencies.
Jaiz Bank's VR of 'b-' is one notch below the 'b' implied VR, reflecting the business profile constraint.
In assessing Jaiz Bank's ratings, Fitch considered important differences between Islamic and conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance. Islamic banks' ratings do not express an opinion on the bank's compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications.
GOVERNMENT SUPPORT RATING (GSR)
Sovereign support to commercial banks cannot be relied on given Nigeria's weak ability to provide support, particularly in foreign currency. The GSR is therefore 'no support', reflecting our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the Nigerian commercial banks become non-viable.
The National Ratings of Jaiz Bank reflect its creditworthiness relative to that of other issuers in Nigeria and are driven by its standalone strength. They are at the lower end of the scale, primarily reflecting Jaiz Bank's small franchise. Jaiz Bank's National Short-Term Rating is the higher of two possible options under Fitch's criteria, reflecting the relative strength of its funding and liquidity profile, which reduces the vulnerability of default on its short-term local-currency obligations within Nigeria.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Erosion of capital buffers to levels close to or below the bank's minimum regulatory requirements, which could result from significant asset-quality weakening and higher impairment charges leading to losses and/or aggressive growth that is not supported by further capital injections.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- An upgrade of the Long-Term IDR would require an improvement in the bank's franchise while maintaining reasonable financial-profile metrics.