Fitch Ratings has affirmed Nigeria-based Guaranty Trust Holding Company Plc's (GTCO) and its core banking subsidiary Guaranty Trust Bank Limited's (GTB) Long-Term Issuer Default Ratings (IDRs) at 'B' with Stable Outlooks and National Long-Term Ratings at 'AA(nga)'. A full list of rating actions is below.

Fitch has withdrawn GTB's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned GTB a Government Support Rating (GSR) of 'No Support'.

Key Rating Drivers

Standalone Strength Drives Ratings: The Long-Term IDRs of GTCO and GTB are driven by their standalone creditworthiness, as expressed by their Viability Ratings (VRs) of 'b'. The VRs reflect the entities' exposure and sensitivity to the volatile Nigerian operating environment as well as the group's franchise strengths, solid profitability and strong capital buffers, which provide good loss-absorption capacity. The VRs are one notch below the 'b+' implied VRs, reflecting the Operating Environment/Sovereign Rating Constraint.

The National Ratings are driven by GTCO's and GTB's standalone strengths. They are at the higher end of the scale given GTCO's and GTB's strong business and financial profiles.

VRs Equalised with Group VR: GTCO is the bank holding company (holdco) for GTB. The VRs of GTCO and GTB are the same as the group VR. This is because Fitch believes the failure risk at the holdco and the bank is substantially the same as that of the whole group. GTCO's VR also captures low double leverage (end-2021: 103%) at the holdco and our expectation that any potential regulatory restrictions on GTB paying dividends or upstreaming liquidity to the holdco will be limited.

Downside to Operating Conditions: Rising global risks will weaken domestic operating conditions. Inflation (16.8% in April 2022) is expected to remain stubbornly high, posing downside risks to our real GDP growth forecasts of 3.1% in 2022 and 3.3% in 2023. However, downside risks are somewhat mitigated by strong oil prices, which should also underpin growth in non-oil sectors and banks' asset quality.

Leading Banking Franchise: GTCO's business profile is underpinned by GTB's top-tier banking franchise, and a well-established and diverse business model. GTB represented 99% of group assets at end-2021. The establishment of a holdco structure in 2021 enables GTCO to provide end-to-end financial services, enhancing its franchise.

High Oil Prices Help Asset Quality: GTCO's impaired (Stage 3 under IFRS 9) loan ratio improved to 6.0% at end-2021 (end-2020: 6.4%), reflecting the gradual easing of operating environment risks, write-offs (0.4% of average loans in 2021) and loan book growth (8.2%). The Stage 2 loans ratio also improved but remains high (end-2021: 14.3%; end-2020: 16.2%) and concentrated. High oil prices will support GTCO's asset quality in 2022, given the group's outsized exposure to the oil and gas sector (end-2021: 43%).

Solid Profitability: GTCO's profitability remains strong and at the higher end of peers but was weaker in 2021 (operating profit/risk-weighted assets: 7.2%; 2020: 8.3%) due to lower yields on the securities book (end-2021: 24% of total assets). The net interest margin contracted to 6.8% in 2021 (2020: 9%) despite loan growth. Profitability remains supported by consistently low loan impairment charges and good cost control (cost/income ratio: 43% in 2021).

Well Capitalised: Capitalisation is a relative strength with GTCO's Fitch Core Capital (FCC) ratio (end-2021: 28.2%), total capital adequacy ratio (25.4%) and tangible leverage ratio (15.9%) comparing favourably with peers. We believe GTCO's capital buffers are sufficient for business growth, potential acquisitions, and meeting Basel III requirements.

Stable Funding Profile: The group is predominantly deposit-funded, which reflects its franchise strengths. Low-cost current and savings accounts formed a substantial 86% of total deposits at end-2021. Naira and foreign-currency liquidity is sufficient.

No Support: GTCO's GSR of 'No Support' reflects Fitch's view that sovereign support is unlikely to extend to a bank holding company, given its low systemic importance and a liability structure that could be more politically acceptable to be bailed in. Government support to commercial banks in Nigeria, including GTB, cannot be relied on, given Nigeria's weak ability to provide support, particularly in foreign currency. GTB's GSR is therefore also 'No Support', reflecting our view that senior creditors cannot rely on receiving full and timely extraordinary support.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A sovereign downgrade would result in downgrades of GTCO and GTB's Long-Term IDRs and VRs.

The VR could also be downgraded in case of an increase in the impaired loans ratio significantly above 10% and aggressive loan growth or acquisitions that result in thin buffers over regulatory capital requirements or a sharp decline in the FCC ratio without clear prospects to restore capital.

A rise in double leverage sustainably above 120% or regulatory restrictions on GTB upstreaming dividends/other cashflows to the holdco would pressure GTCO's VR.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of GTCO and GTB's Long-Term IDRs and VRs would require a sovereign upgrade and a continued record of solid financial metrics.

VR ADJUSTMENTS

The Capitalisation and Leverage Score of 'b+' has been assigned below the 'bb' category implied score due to the following adjustment reason: Risk profile and business model (negative).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise stated, the highest level of ESG credit relevance is a score of '3'. ESG issues are credit neutral or have only a minimal credit impact on GTCO, either due to their nature or the way in which they are being managed by GTCO. For more information on Fitch's ESG Relevance Scores, visit http://www.fitchratings.com/esg.

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