FITCH 2015 RISK RATING: KNOW YOUR BANK’S RISK PROFILE

Fitch has affirmed the Long-term Issuer Default Ratings (IDRs) of 10 Nigerian banks.  The IDRs of FBN, UBA, Diamond, Fidelity, Union and FCMB are support-driven. Zenith's, FBNH's, GTB's and Access' IDRs are driven by their standalone strength as measured by their Viability Ratings (VRs).

The IDRs of GTB and FBNH are driven by their VRs and are therefore not sensitive to changes in their SRFs.  Key rating drivers - IDRS, support ratings and support rating floors (all banks apart from SIBTC and SIBTCH that only have national ratings.

However, a one-notch downgrade of the sovereign would not necessarily lead to a downgrade of the SRFs. Zenith's and Access' IDRs would only be downgraded if both their Viability Ratings (VRs) and their Support Rating Floors (SRFs) are simultaneously downgraded (both banks VRs and SRFs are currently at the same level) and revised lower.

In assessing the probability of sovereign support, Fitch considers the authorities' willingness to support the Nigerian banks to be high as demonstrated in the past, but its ability to do so may be constrained by Nigeria's 'BB-' sovereign rating.

Fitch assigns Support Rating Floors (SRFs) based on each bank's systemic importance. The most systemically important banks in Fitch's view are FBN, Zenith and UBA, which are assigned SRFs of B+'.

The other banks have SRFs of 'B'. FBNH is the holding company of FBN. It's SR of '5' and SRF of 'No Floor' reflect Fitch's view that while the Nigerian authorities' propensity to support local banks is high, the same level of support would not apply to holding companies.

Zenith's VR considers its strong franchise, management quality, conservative risk appetite and robust financial metrics. Asset quality is sound and upstream oil & gas exposure represented a limited 6% of loans at end-September 2014.

Zenith has a track record of good client selection and Fitch does not expect major impairments in its corporate book. The bank's capitalisation and leverage compare well with peers and benefit from a strong funding franchise, sound liquidity and proven access to wholesale markets.

Zenith's resilient financial performance stands out, and the bank should manage 2015 better than most peers.

GTB's VR considers the bank's sound financial metrics compared with most domestic peers. This includes the bank's sound profitability, driven by efficiency gains from a low cost business model, healthy asset quality, driven by sound underwriting, and adequate capital.  The VR also considers a proven strategy implemented by a strong management team.

FBNH's and FBN's VRs reflect the group's traditionally strong company profile and adequate capitalisation and profitability. Asset quality metrics are acceptable but the group has the highest oil & gas exposure among peers (40% of gross loans at end-September 2014).

This is a key risk, in particular the upstream book (12%). FBNH's has a strong funding franchise. Its retail franchise allows it to source low-cost deposits, and it successfully accessed capital markets in 2014. Group liquidity is adequate.

UBA's VR is constrained by weak, albeit improving, capitalisation. The VR also considers a strong company profile, including a broader international footprint than peers. This makes the bank less sensitive than peers to current turbulence in Nigeria, although 2015 will still be challenging.

Asset quality is adequate. NPLs are currently low, although Fitch expects these to increase. UBA has strong funding and liquidity. Its large pan-African network allows it to collect low-cost deposits, and the loan-to-deposit ratio is low.

Access' VR reflects the bank's adequate capitalisation, which will improve should a planned rights issue complete successfully. The VR also considers the bank's stronger company profile since the Intercontinental Bank acquisition. This has benefitted Access' financial metrics, including improved earnings and asset quality.

Diamond's VR is constrained by weak capitalisation, which is inadequate in light of the bank's risk profile, despite the completion of a rights issue in November 2014. Asset quality is slightly weaker than most peers.

While the level of impaired loans is currently acceptable, certain large exposures present downside risk. Fitch views risk appetite as high, considering plans to materially expand retail and SME lending activities. While these segments are inherently risky, this is where the bank's expertise lies.

Furthermore, risk controls and underwriting standards in the retail business are advanced. The VR also reflects Diamond's acceptable earnings, funding and liquidity.

Fidelity's VR reflects the bank's weaker company profile than peers. The bank's lack of scale manifests in its niche business model. The VR also considers Fidelity's weaker and less stable earnings than peers, a high cost base, and a greater reliance on non-core banking revenues.

The VR also considers the bank's improved asset quality metrics over the last three years.

Union's VR reflects threats to asset quality ratios from a sizeable portfolio of past due, but not impaired, loans and a material exposure to the oil sector. The VR also considers a higher risk appetite than peers, indicated by loan growth above the sector average, albeit from a lower base than peers.

The VR further considers some exposure to operational risk resulting from a weaker technological platform than peers, which Union is currently addressing.

The VR factors in weak earnings, but also a resilient funding profile supported by adequate liquidity.

FCMB's VR is currently constrained by its small but evolving full service banking franchise. The bank plans to expand lending in what Fitch views as inherently high- risk retail and SME segments.

Asset quality is acceptable, although its NPL ratio is likely to worsen as the loan book seasons. Capitalisation is sound, although Fitch expects a weakening in the medium term, driven by loan growth. Earnings are adequate despite a high cost-to-income ratio.

Funding and liquidity are considered the bank's weaknesses, with the regulatory liquidity ratio being one of the lowest in the sector, and the loan-to-deposit ratio being close to 80%.

FBN Long-term foreign currency IDR: affirmed at 'B+'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'A+(nga)' National Short-term rating: affirmed at 'F1(nga)' Viability Rating: affirmed at 'b' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B+' FBN Finance Company BV's subordinated notes: affirmed at 'B-'; assigned 'RR6' FBNH Long-term foreign currency IDR: affirmed at 'B'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'A(nga)' National Short-term rating: affirmed at 'F1(nga)' Viability Rating: affirmed at 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor'

Zenith Long-term foreign currency IDR: affirmed at 'B+'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'AA-(nga)' National Short-term rating: affirmed at 'F1+(nga)' Viability Rating: affirmed at 'b+' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B+' Global medium term note programme affirmed at 'B+' /'RR4'/'B' Senior unsecured notes: affirmed at 'B+'/'RR4'

UBA Long-term foreign currency IDR: affirmed at 'B+'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'A+(nga)' National Short-term rating: affirmed at 'F1(nga)' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B+'

Access Long-term foreign currency IDR: affirmed at 'B'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'A-(nga)' National Short-term rating: affirmed at 'F2(nga)' Viability Rating: affirmed at 'b' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' Access Finance BV's senior notes, guaranteed by Access Bank: affirmed at 'B'/'RR4' Subordinated notes: affirmed at 'B-'/ 'RR6'

GTB Long-term foreign currency IDR: affirmed at 'B+'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'AA-(nga)' National Short-term rating: affirmed at 'F1+(nga)' Viability Rating: affirmed at 'b+' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' GTB Finance BV's senior notes, guaranteed by Guaranty Trust Bank: affirmed at 'B+'/'RR4' GTB Finance BV's global medium-term note programme, guaranteed by Guaranty Trust Bank: affirmed at 'B+'/'RR4'/'B'

Diamond Long-term foreign currency IDR: affirmed at 'B'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'BBB+(nga)' National Short-term rating: affirmed at 'F2(nga)' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' Senior unsecured notes: affirmed at 'B'/'RR4'

Union Long-term foreign currency IDR: affirmed at 'B'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'BBB+(nga)' National Short-term rating: affirmed at 'F2(nga)' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B'

Fidelity Long-term foreign currency IDR: affirmed at 'B'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'BBB+(nga)' National Short-term rating: affirmed at 'F2(nga)' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' Senior unsecured notes: affirmed at 'B'/'RR4'

FCMB Long-term foreign currency IDR: affirmed at 'B'; Stable Outlook Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'BBB+(nga)' National Short-term rating: affirmed at 'F2(nga)' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B'

SIBTC National Long-term rating: affirmed at 'AAA(nga)' National Short-term rating: affirmed at 'F1+(nga)' SIBTCH National Long-term rating: assigned at 'AAA(nga)' National Short-term rating: assigned at 'F1+(nga)' The National Ratings of SIBTC and SIBTCH are sensitive to a change in potential support from their ultimate parent, SBG.

Rating sensitivities - The ratings and Outlooks are sensitive to a prolonged and severe recession that would affect the ability or willingness of the Nigerian authorities to provide support.

All Outlooks are Stable. Fitch has also affirmed the National Ratings of Stanbic IBTC Bank Plc (SIBTC) and Stanbic IBTC Holdings Plc (SIBTCH). The ratings are all in the 'B' range, indicating highly speculative fundamental credit quality, and factor in Fitch's expectation of increasingly challenging economic conditions and market volatility in Nigeria.

The operating environment is affected by persistently low oil prices, continuing pressure on the domestic currency naira, likely further monetary policy and regulatory actions and increased political uncertainty.

At the same time, the ratings are underpinned by continued strong underlying economic growth in Nigeria, particularly in non-oil sectors. Fitch expects non-oil GDP growth of 5.5% in 2015 (2014: 7.5%), driven by continued economic reforms and limited impact from public sector austerity. The highly challenging and volatile operating environment in Nigeria constrain the VRs and the other key rating factors, particularly the banks' financial profiles.

The recent oil price shock and subsequent currency pressure has weakened the Nigerian operating environment and is likely to result in lower GDP growth in 2015. In turn, the banks are likely to report weaker profitability, asset quality and capital ratios. These pressures are to an extent captured in Fitch's ratings, and partly explain the Stable Outlooks.

Nevertheless, should the operating environment deteriorate faster than expected, particularly should it significantly impact the banks' capital and asset quality, VR downgrades cannot be ruled out.

Fitch forecasts sector non-performing loans (NPLs) to rise above the Central Bank of Nigeria's (CBN) informal cap of 5%, but below 10% by end-2015. This reflects high credit concentrations as well as emerging risks, particularly in the oil and gas, and power sectors.

These factors, together with a shift to Basel II and CBN's revised regulatory capital computation rules, are likely to add more pressure on capital than previously expected. Tier 1 capital ratios could fall below 15% for many banks, which is low in the Nigerian context.

Oil & gas exposures, particularly upstream segment lending, will be sensitive to low oil prices, in particular when loans are extended to indigenous companies rather than large international operators. If low oil prices persist in 2015, Fitch expects some banks will have to restructure part of these portfolios by extending tenors to better match new cash flow projections.

Fitch expects liquidity to remain tight in 2015, amplified by higher central bank reserve requirements. New limits on foreign currency borrowing and net open positions are likely to reduce US dollar debt issuance. Despite increasing competition for low-cost and stable deposits, customer deposit growth should remain healthy and help loans-to-deposit ratios remain below the regulatory limit of 80%.