GCR Affirms Providus Bank Ratings, Revised Outlook

Ahead of merger deal, GCR Ratings has affirmed Providus Bank Limited’s national scale long and short-term issuer ratings of BBB-(NG) and A3 (NG) respectively, with the outlook revised to rating watch evolving from stable.

The emerging market ratings agency said its ratings watch evolving outlook on Providus Bank Limited reflects the potential impact of the Central Bank of Nigeria’s (CBN) proposed merger with Unity Bank Plc, on the bank’s credit profile over the next six to 12 months.

The rating affirmation, according to GCR, balances a moderate competitive position and risk position, a stable funding structure, and adequate liquidity.

Providus Bank, a regional commercial bank has grown aggressively over the last five years, the rating note reads, registering a balance sheet size of N2.2 trillion or USD1.4 billion as of 30 June 2024, approximately 40% over the position at the end of the 2023 financial year.

GCR said the Bank balance sheet size translated to an estimated 1.5% share of the banking industry’s resources.

The ratings agency expressed that the bank’s growth has been largely driven by strategic partnerships, strong shareholders’ support, and a good digital presence.

Providus Bank’s operating revenues totalled N91.0 billion in 2023, with net interest income and non-interest income contributing 40.8% and 59.2% respectively.

In August 2024, the CBN announced a proposed merger with Unity Bank Plc, a relatively smaller Nigerian-based commercial bank with a national license.

Given that the process is ongoing, GCR said it will assess the possible impact on the bank’s credit profile in the coming months.

GCR core capital ratio improved slightly to 24.2% as of 30 June 2024 from 23.5% in December, 2023 which was supported by good earnings generation and retention despite the growth in risk-weighted assets.

Positively, the bank’s loan loss reserve coverage of stage 3 loans strengthened to 109% in 2023 from 52.1% the prior year, the rating note said.

“While the GCR core capital ratio could moderate over the next 12-18 months, we expect it to range above 20.0% on the back of risk asset growth and good earnings accretion”.

For the bank, GCR said risk is a positive ratings factor, reflective of the bank’s relatively good asset quality metrics. In 2023, the loan book grew by a significant 75.7% to N506.6 billion or USD563.2 million and further to N646.1 billion or USD426.9 million as of 30 June 2024.

However, the non-performing loans ratio also rose to 6.0%, up from 2.3% in financial year 2023, standing currently above the regulatory minimum of 5.0%.

GCR said in the same period, Providus Bank’s credit loss ratio registered at a higher 2.1%, a steep increase from 1.4% in 2022, reflecting additional provisions due to the expanding loan portfolio and prevailing weak macroeconomic environment.

Positively, obligor concentration moderated considerably, as the twenty largest obligors accounted for a lower 4.0% of gross loans as of 31 December 2023 from 37.2% in 2022 due to repayments by large obligors and an expanded loan portfolio.

The bank’s foreign currency (FCY) loans remained relatively stable, accounting for 10.3% of the loan portfolio, similar to the previous year (10.2%), and well below the industry average of about 45%, according to GCR.

The ratings agency said additionally, the inherent risks on these FCY loans are partly mitigated by granting these loans to obligors with foreign currency receivables.

“In view of lingering weaknesses in the operating environment, asset quality metrics could be pressured across the banking sector; however, we do not foresee a significant deterioration of the bank’s loan book in the near term”, GCR stated.

It added that assessment of funding and liquidity is positive to the ratings, underpinned by a stable funding base and a liquid balance sheet.

Providus Bank is predominately funded by stable customer deposits, which accounted for 86.0% of the funding base as of 31 December 2023 from 84.6% in 2022.

GCR stated that the bank’s customer deposits have grown steadily over the years, increasing by 121.8% to N1.1 trillion or USD1.2 billion as of 31 December 2023, and further to N1.5 trillion or USD 991.2 billion in June 2024.

“This growth is largely attributed to the bank’s effective deposit mobilisation strategy”, the rating note emphasises.

The ratings agency said given the heightened interest rate environment and about 44.8% of customer deposits in costly and rate-sensitive term deposits, the cost of funds inched up to 6.1% from 5.9% in 2022

“This is expected to moderate as the bank onboards more retail clients in line with its low-cost deposit generation strategy”.

GCR liquid assets coverage of customer deposits and wholesale funding registered at an adequate 36.5% and 2.2x respectively in 2023, reflecting pressures from cash reserve requirements.

“We expect funding and liquidity metrics to remain at acceptable levels over the next 12-18 months”, the rating agency stated.

Outlook statement

The ratings watch evolving outlook reflects expectations that the ratings may be downgraded, improved, or unchanged depending on GCR’s assessment of the anticipated merger of Unity Bank Plc when concluded. #GCR Affirms Providus Bank Ratings, Revised Outlook

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