Jaiz Bank Credit Quality Falls over High Concentration, Financing Weakness
Fitch Ratings has assigned Nigeria-based Jaiz Bank a Long-Term Issuer Default Rating (IDR) of ‘B-‘ with a stable outlook and a Viability Rating (VR) of ‘b-‘.The global rating agency said the IDRs of Jaiz Bank is driven by its standalone creditworthiness, as expressed by its VR of ‘b-‘.
” ‘b’, highly speculative ratings that denote weak prospects for ongoing viability. Material failure risk is present, but a limited margin of safety remains.
“The bank’s capacity for continued unsupported operation is vulnerable to deterioration in the business and economic environment”, according to rating explanation.
Fitch said the Islamic lender’s viability rating of ‘b-‘ is one notch below the ‘b’ implied viability rating, which reflects Jaiz Bank business profile constraint.
It added that the Islamic banking ratings also reflect the concentration of operations within Nigeria’s challenging operating environment, a small but evolving franchise, and high credit concentrations.
The weak viability ratings considered the bank aggressive financing and balance-sheet growth which is expected to continue over the medium term, and financing-quality weaknesses. However, it reflects the bank healthy profitability, reasonable capitalisation and comfortable liquidity coverage.
Jaiz Bank, the first fully-fledged non-interest 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 the end of 2020.
Fitch said the Islamic lender revenue diversification is particularly weak by domestic standards, with non-financing income representing just 8% of operating income in 9M-2021 as Jaiz Bank is restricted from some conventional banking activities.
Exceptionally high financing growth has prevailed in recent years at 30% in 2020 and 32% in 9M-2021, 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 of 1H-2021. 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 of 1H-2021) is above the banking-sector average (weighted average of 5.9%), despite having been flattered by strong financing growth.
However. the report stated that the Islamic lender’s total impairment allowance coverage of impaired financing assets (71% at end of 1H-2021) is adequate. Stage 2 exposures that account for 6% of gross financing at end of 1H-2021 are moderate by domestic standards and financing under debt relief is low, accounting for 3% of gross financing at end of 9M-2021.
“Our asset-quality assessment also considers a high share of non-financing assets, including government Sukuk at 28% of total assets in its 9M-2021, cash and reserves at the Central Bank of Nigeria at 15%, interbank placements (7%) and commodities purchased against specific customer undertakings to buy under Murabaha inventory finance contracts (7%)”.
The ratings note also spotted that the bank net financing assets represented just 37% of total assets, according to the rating note. Fitch said Jaiz Bank demonstrates healthy profitability, as indicated by operating returns on risk-weighted assets of 4.7% in 9M-2021 (annualised).
It noted that the 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 9M-2021, 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 printed 20.4% at end of 9M-2021 is among the highest across the banking sector but is considered in view of a low risk-weight density of 36% at end of 9M-2021.
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 of 9M-2021. Recalled Jaiz bank received a N3.3 billion new capital injection in September 2021 in the form of a private placement by an existing shareholder.
Fitch understands from management that the largest shareholders remain committed to providing further capital to support its growth ambitions.
It said the bank’s net impaired financing assets represented a moderate 14% of FCC at end of 1H-2021 but strong pre-impairment operating profit, which equalled 8.7% of average gross financing in 9M-2021 (annualised), provides a sizeable buffer to absorb impairment charges without weighing on capitalisation.
Jaiz Bank’s total capital adequacy ratio (CAR) was 18.1% at end of 9M-2021, which Fitch thinks 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 at 82% of customer deposits at end of 9M-2021 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 of 1H-2021. However, Fitch said Jaiz Bank’s gross financing to customer deposits ratio which printed at 51% in 9M-2021 is low.
However, the bank liquidity coverage is seen as comfortable in both local and foreign currencies. Read Search: Islamic Lender Jaiz Bank Posts Sky-High Earnings Growth
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