Fitch Ratings has affirmed Ecobank Transnational Incorporated's (ETI) Long-Term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook and Viability Rating (VR) at 'b-'.

A full list of ratings actions is below.

Key Rating Drivers

ETI's Long-Term IDR is driven by its standalone creditworthiness, as expressed by its 'b-' VR. As a non-operating bank holding company (BHC), ETI's VR is notched down once from the 'b' group VR due to high common equity double leverage (167% at end-2022).

The group VR considers a leading pan-African franchise, strong revenue and geographical diversification, improved asset quality, healthy operating profitability and a strong funding and liquidity profile. These considerations are balanced against the group's heightened exposure to foreign-exchange (FX) risk and moderate capitalisation in the context of its risk profile.

High Double Leverage: ETI's VR is one notch below the group VR, reflecting higher failure risk at the BHC due to high common equity double leverage.

Rising Sovereign Risks: Operating conditions are being negatively influenced by rising sovereign debt sustainability risks across Sub-Saharan Africa (SSA). Nigeria (B-/Stable) and Ghana (RD), which are two of the group's largest markets, suffered downgrades in the past year, with the latter defaulting on local- and foreign-currency (FC) debt in 1Q23. Sovereign risks, including high exposure to 'B-' and below rated sovereigns, are mitigated by geographical diversification.

Strong Pan-African Franchise: The group had banking subsidiaries spanning 33 SSA countries and assets of USD29 billion at end-2022, making it one of the largest banking groups on the continent outside of South Africa. Strong revenue diversification is supported by a broad geographical footprint and high non-interest income (2022: 45% of operating income).

Heightened FX Risk: The group is exposed to the depreciation of SSA currencies through its equity investments in subsidiaries given that its reporting currency is US dollar. The depreciation of SSA currencies (in particular the CFA franc, the Nigerian naira and the Ghanaian cedi) led to large FC translation losses through other comprehensive income (OCI) that exceeded net income in 2022. The impact of FC translation losses on capitalisation is mitigated by risk-weighted assets (RWAs) reducing in dollar terms as SSA currencies depreciate.

Sound Loan Quality: The impaired loans (Stage 3 loans under IFRS 9) ratio declined to 5.2% at end-2022 (end-2021: 6.4%), primarily due to write-offs and robust loan growth. Specific loan loss allowance coverage of impaired loans also declined to 53% at end-2022 due to the release of provisions on a heavily-collateralised upstream oil and gas loan. Asset quality has been weakened by rising sovereign risks due to large holdings of sovereign fixed income securities.

Healthy Operating Profitability: Operating profit/RWAs improved significantly to 3.8% in 2022 (2021: 3.2%) due to a wider net interest margin and greater cost efficiency. Fitch expects FC translation losses through OCI to decline in 2023, reflecting a broadly stable CFA franc, an appreciating cedi and the naira depreciating only modestly against the US dollar.

Moderate Capital Buffers: The group's common equity Tier 1 (CET1) ratio declined to 9.6% at end-2022 (end-2021: 10.0%) due to large FC translation losses, leaving only a moderate buffer over its current minimum regulatory requirement (8.5%). The ratio remains low compared with SSA peers and is considered moderate in the context of the group's risk profile.

Strong Funding Profile: The group's funding profile benefits from a high percentage of current and savings accounts and low depositor concentration. Fitch considers ETI will be able to utilise group liquidity and leverage its strong relationships with development finance institutions in refinancing the large amount (USD675 million, including a USD500 million Eurobond in April 2024) of BHC debt maturing in 2024.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

ETI's VR and Long-Term IDR could be downgraded if large FC translation losses through OCI, including those that would stem from a material depreciation of the naira, erode headroom above the group's regulatory minimum CET1 ratio requirement (8.5%). The ratings are also sensitive to sovereign downgrades in ETI's key markets, specifically Nigeria, or increased exposure to 'B-' or below rated sovereigns.

ETI's VR and Long-Term IDR may also be downgraded if common equity double leverage increases materially from current levels, including due to capital injections into subsidiaries or the depreciation of SSA currencies, which could result in a widening of the notching between the group VR and that of the BHC. The ratings are also sensitive to reduced prospects for refinancing large upcoming BHC debt maturities.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

ETI's VR and Long-Term IDR could be upgraded if there is a reduction in common equity double leverage sustainably below the 120% threshold.

ETI's VR and Long-Term could also be upgraded if there is significant improvement in operating conditions that accompanies a material reduction in the group's exposure to structural FX risks and a moderation in FC translation losses.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

ETI's senior unsecured notes are rated in line with its Long-Term IDR because in our view, the likelihood of default on these reflects that of the BHC. The Recovery Rating of these notes is 'RR4', indicating average recovery prospects.

The Government Support Rating (GSR) of 'no support' (ns) reflects Fitch's view that support from any sovereign authority is unlikely to extend to the BHC given its low systemic importance and a liability structure, including foreign/wholesale funding, which could be more politically acceptable to bail-in. Fitch believes that some of ETI's subsidiaries could be supported by their respective national authorities but this support is unlikely to extend to ETI itself.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

ETI's senior unsecured debt rating is sensitive to a change in its Long-Term IDR.

The GSR is unlikely to be upgraded as we believe the authorities' propensity to support the BHC is unlikely to increase.

VR ADJUSTMENTS

The business profile score of 'b+' has been assigned below the 'bb' category implied score due to the following adjustment reason: organisational structure (negative).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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