Fitch Ratings awarded Oragroup SA (Oragroup) a long-term issuer default rating (IDR) of ‘B-‘ with a stable outlook and a viability rating (VR) of ‘b-‘. A full list of ratings is provided below.
Main rating factors
IDRS and VR
Oragroup is a Togo-based bank holding company (holdco), which operates a group of wholly-owned banking subsidiaries in 12 Francophone African countries. Oragroup’s long and short term IDRs are determined by its intrinsic creditworthiness, as defined by the ‘b-‘ VR. Oragroup’s VR is assigned at the same level as the group’s VR because Fitch believes that the risk of failure of the holding company is substantially the same as that of the group as a whole.
The stable outlook on the long-term IDR reflects our view that Oragroup has sufficient headroom at the current rating to absorb risks related to pressures from the operating environment, primarily on its capitalization and the quality of its assets. The stable outlook also envisages corrective actions by the group to strengthen capitalization and asset quality over the next 18 to 24 months.
Oragroup’s RV is consistent with the implied RV of “b-” based on the exposure draft of Fitch’s criteria published on August 17, 2021.
VR reflects the group’s modest, albeit expanding franchise, diversified business model and healthy funding and liquidity. It also takes into account low asset quality, acceptable profitability and a vulnerable capital position.
Asset quality is a weakness due to a high credit-impaired/IFRS 9 Stage 3 ratio of 21.5% at the end of HY21 and a modest total reserve coverage of 44%. At the end of 2020, approximately 40% of impaired loans were from past acquisition and other legacy exposures from the past.
We expect impaired loans to gradually decrease over the next two years, due to the corrective measures taken by the group (some of which have already been completed or are nearing completion). Net lending represents only around 50% of total assets, with the balance mainly made up of liquid assets (sovereign securities and interbank investments), which underpins our overall assessment of asset quality.
Profitability parameters are acceptable in the low interest rate environment in the WAEMU region. Margins are low due to low rates and reliance on expensive term deposits, but this is offset by strong non-interest income generation.
We see capitalization as a key rating weakness. This mainly reflects a very high capital charge due to non-restricted Stage 3 loans, as these represented 2.1x Oragroup’s Common Equity Tier 1 (CET1) capital at the end of 1H21. In addition, capital ratios have narrow leeway with respect to regulatory requirements. Oragroup’s regulatory CET 1 ratio and total solvency ratio stood at 8.1% and 11% respectively at the end of HY21, against minimum regulatory requirements of 7.3% and 10.8%, respectively.
Oragroup’s capital increase plans are at a fairly advanced stage with preferred shares and subordinated debt to be issued in 2022. This, combined with a potential recovery in profitability and risk-weighted asset optimization initiatives based on risk (RWA) should result in stronger capitalization and cushions, in our view.
Funding and liquidity are rating strengths. The funding base is dominated by customer deposits in local currency and low-cost current and savings accounts. The concentration of deposits is modest. Because of its ownership and franchise strengths, Oragroup raises market funds from development finance institutions (DFIs), some on concessional terms. Liquidity buffers are substantial, supported by a large stock of sovereign securities and balances with central banks.
The double leverage of 123% at the holding company level at the end of HY21 (end of 2020: 129%) was above the 120% threshold at which Fitch would generally consider reducing the holding company’s ratings compared to the VR group. Due to the impending capital injections in three subsidiaries and the absence of a dividend upstream of the subsidiaries, we expect the double leverage to increase further by the end of 2021 and will not fall below 120% until 2024 .
Although the double leverage is excessive, we do not reduce the RV of the holding company relative to the RV of the group because i) the holding company continues to receive sufficient cash flows from the subsidiaries in the form of fees and other payments, reducing its dependence on upstream dividends and (ii) the holding company’s debt is predominantly denominated in local currency with a large portion owed to shareholders as well as other DFIs, thus limiting refinancing risks.