S&P Global Ratings has downgraded its long- and short-term counterparty credit ratings on Diamond Bank PLC to ‘B-/C’ from ‘B/B’ and placed the long-term rating on CreditWatch with negative implications.
Also, it lowered its long- and short-term Nigeria national scale ratings on the bank to ‘ngBB/ngB’ from ‘ngBBB-/ngA-3’ and placed the long-term national scale rating on CreditWatch negative.
According to the rating agency, at year-end 2015, Diamond posted a sharp 37% rise in nonperforming loans (NPLs) to 7.1%, and a 96% increase in the cost of risk to 6.7%, compared with a peers’ average of about 6.0% and 3.0%, respectively.
“We think Diamond’s asset quality and earnings stability is vulnerable to further contraction in Nigeria’s economy over the next 12 months, especially given its balance sheet concentrations including a sizable sectoral concentration on oil and gas (31% of total loans and 12% of NPLs), most of which has been restructured over the past 12 months by extending the tenor of loans;”S&P said.
“Exposure to other cyclical sectors, such as general commerce, manufacturing, and real estate and construction, which together accounted for 40% of total loans and 62% of NPLs as of March 31, 2016; and Single-obligor and foreign currency lending concentrations, where the top-20 loans accounted for about 35% of total loans and one-half of the NPLs at year-end 2015; while approximately 50% of loans were denominated in foreign currency.”
It said that these increases resulted in low profitability overall and demonstrated the sensitivity of the bank’s assets to the downturn in the economic cycle in Nigeria.