With a revised positive outlook, GCR Ratings has reaffirmed Jaiz Bank Plc.’s national scale long and short-term issuer ratings of BBB-(NG) and A3 (NG), respectively. GCR was founded in 1996 as the African division of Duff & Phelps, which is traded on the New York Stock Exchange. GCR’s ratings play a significant role in the growth of Africa’s financial markets by providing critical insights into credit across a range of sectors.
In the rating note, GCR stated the positive outlook attached to the ratings of Jaiz Bank Plc reflects the possibility of a strengthening in capital should planned equity injections materialise. The optimistic forecast is a result of GCR’s expectations that Jaiz Bank could raise additional capital to support its expansion plans and market deepening strategy in the near term.
It was highlighted that the Bank has shown good execution on previous capital raise, and if successful, core capital metrics could increase significantly and cater for any possible weakening in asset quality over the medium term.
The ratings of Jaiz Bank were confirmed, according to GCR, “recognises its intermediate capital and leverage assessment which reflects shareholders’ support and stable earnings.” According to the rating note, Jaiz Bank’s funding structure remains broadly within the average range of the industry and its liquidity profile is appropriate, though impacted by regulatory cash reserve debits.
The Jaiz Bank’s risk position is rated as intermediate by the developing market ratings company, which points out that it has a high ratio of non-performing loans compared to the regulatory maximum. Since its founding in 2012, Jaiz Bank has held the top spot in the Nigerian banking industry’s non-interest banking segment. It was the first standalone non-interest bank in the country.
While the Bank’s market share of the sector’s resources was less than 2%, according to GCR, its contribution to the non-interest banking segment’s total assets, financing portfolio, and profit before tax were all significant at 66.3%, 75.1%, and 91.7%, respectively, in 2021.
“Although the Bank’s market share of the sector’s resources was less than 2%, its contribution to the total assets, financing portfolio and profit before tax of the non-interest banking segment was significant at 66.3%, 75.1% and 91.7% respectively in 2021,” according to GCR.
In light of the projected capital infusion and an expansion of its operations to encompass additional financial services, GCR anticipates the Bank to maintain its dominant position within the non-interest banking niche in the foreseeable future.
Meanwhile, Jaiz Bank’s contribution to the broader banking sector will remain minimal, it said. Similarly, GCR said in the rating note that its assessment of management and governance is neutral, although concerns have been raised over the Bank’s credit and operational risk management.
“While we recognise positively the adoption of an internal risk rating model by the Bank in 2022, GCR views the credit assessment outcome of the Bank’s top twenty obligors to be generous”.
Also, a cyber-attack on the Bank’s operations in 2021 highlights system vulnerabilities, heightening operational risk, according to the rating note. Moreover, the bank’s capitalisation is considered a positive rating factor. Jaiz Bank’s GCR Capital Ratio of 29.2% as of the end of the financial year 2021 improved from 23.1% in the prior year.
This was supported by a N3.3 billion capital injection by an existing shareholder last year. Once more, GCR noted that its view on capital and leverage is positive on the back of an anticipated capital injection which could raise the Bank’s GCR Capital Ratio above 30% over the next 12-18 months.
“The Bank’s risk position is characterised by moderate sector and obligor concentrations in the financing portfolio, high NPLs and an evolving credit risk assessment framework.” Jaiz Bank’s financing portfolio stood at N124 billion, reflecting a 60.7% growth year-on-year, according to the rating note in 2021.
“A further 34.3% increase in the financing portfolio was registered as of 30 September 2022 and the top three lending sectors collectively accounted for 52% of the financing portfolio as at the same date,” GCR said.
The financing portfolio over the last two years accounted for about 35% Jaiz Bank’s twenty largest obligors. The non-interest financing institution’s NPLs in 2021/improved to 5.7%, from 11.1% in 2020, on the back of repayments and growth in the financing portfolio.
Meanwhile, for the nine-month period that ended 30 September 2022, NPLs rose by 96% in absolute terms and translated to a ratio of 8.3%, above the regulatory maximum of 5%. Furthermore, the cost of risk was high at 3.7% from 4.5% in 2020 in the same period, according to the rating note.
Also, GCR noted that Jaiz Bank’s risk position remains vulnerable to weak macroeconomic fundamentals (given exposures to vulnerable and cyclical sectors) as well as an evolving risk management framework.
“Although the Bank’s financing portfolio is well collateralised largely with mortgages, the legal challenges associated with foreclosure in Nigeria as well as the lengthy litigation processes that follow may stall recovery efforts”.
The lender’s funding and liquidity are considered positive as total deposits accounted for a high 86.9% of the Bank’s funding base and a stronger contribution of core deposits to the total funding base year-on-year, printed at 46.4% in 2021, and 39.1% a year earlier for the rating assessment.
Adding that the cost of funds at 2.3% compared favourably with the banking sector’s average in 2021, saying that Jaiz Bank’s regulatory liquidity ratio of 28.8% at the end of 2021 from 43.1% in 2020 was well above the required minimum of 10%, though moderated by CBN’s aggressive CRR stance across the banking sector.
Resulting to GCR liquid asset coverage of customer deposits dipped to 47.6% in 2021 versus 63.8% in 2020 and the coverage of total wholesale funding was lower at 3.2x in 2021 from 7.3x in 2020.
After the new cash reserve ratio (CRR) effective September 2022, GCR analysts said they expect further stress on the banking sector’s liquidity, including Jaiz Bank’s. Nonetheless, the Bank’s liquidity ratio is expected to remain within the regulatory threshold, the rating note explained.
Finally, should the capital injection not be concluded over the outlook horizon, there could be some downward pressure as asset quality could deteriorate and cause earnings and capital to moderate.
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