Ecobank Nigeria is particularly susceptible on account of the elevated risk around the capital from its huge impaired loans that are denominated in foreign currency.
Ratings agency, Fitch took a dim view of the intrinsic creditworthiness of Ecobank Transnational Incorporated (ETI) and its local unit Ecobank Nigeria, placing both entities on watch for a potential downgrade.
The two are in line to take a hit in their Viability Ratings (VRs) and Long-Term Issuer Default Ratings (IDRs) on the heels of the move to allow the naira to weaken by about 40 per cent in June.
While VR assesses the innate creditworthiness of issuers, IDR is the metric indicating an issuer's relative vulnerability to default on financial obligations.
ETI, which has footprints in 35 sub-Saharan African countries, counts Nigeria as its largest market.
Fitch noted in a Monday commentary seen by PREMIUM TIMES that putting the two organisations' VR of 'b-' and IDR of 'B-' on Rating Watch Negative highlights the risk of the entities falling short of their minimum capital requirements following "the direct effect of the devaluation."
Ecobank Nigeria is particularly susceptible on account of the elevated uncertainty around the capital from its huge impaired loans that are denominated in foreign currency.
The lender's credit quality sharply deteriorated in the wake of weakening the naira, Fitch said, setting the stage for a bigger allowance for impairment and raising the odds that the bank's capital adequacy ratio will be further strained.
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"Fitch has also placed ENG's Shareholder Support Rating (SSR) of 'ccc+' on RWN, reflecting the potential for ETI's ability to provide shareholder support, if required, to be weakened following the devaluation," the document said.
"Fitch expects to resolve the RWN within the next six months when exchange-rate volatility may recede, the impact on regulatory capital ratios and common equity double leverage is clear, and the scale of the second-order economic effects of the devaluation on loan quality becomes evident," it added.
The naira plunged in value by 63 per cent to the U.S. dollar in the official market in the seventeen days to the end of June following a whirlwind of monetary reforms by newly inaugurated President Bola Tinubu targeting harmonisation of Nigeria's web of exchange rates.
A departure from a tightly controlled currency market to an era of managed float, where exchange rate movement will be largely shaped by market forces, is intriguing investors and restoring confidence.
Although the reforms closed up the spread between the black market and the official exchange rates, a gulf as wide as 60 per cent before the naira was weakened to a historic low last month, the new development implies debts and loans denominated in dollars will likely balloon in local currency.
Fitch is projecting Nigeria's foreign exchange overhaul will have sweeping macro-economic implications in the near term even though it could favour the country's sovereign credit profile.
