Fitch Ratings has placed Oragroup S.A.'s (Oragroup) Long-Term Issuer Default Rating (IDR) of 'B-' and Viability Rating (VR) of 'b-'on Rating Watch Negative (RWN).
The rating action reflects a heightened probability of a downgrade if Oragroup is unable to restore its regulatory capital ratios above regulatory minimum requirements following a surge in risk-weighted assets (RWAs) due to certain loan guarantees being deemed ineligible for regulatory capital benefit.
Non-compliance with the total regulatory capital ratio by end-2022 could result in a debt covenant breach. Oragroup has submitted a capital plan to its regulator, and Fitch expects to resolve the RWN within six months once there is more certainty about the group's prospects for restoring regulatory capital ratios.
Fitch has withdrawn Oragroup's Support Rating of '5' and Support Rating Floor of 'No Floor' as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 7 September 2022. In line with the updated criteria, we have assigned Oragroup a Government Support Rating (GSR) of 'no support' (ns).
Key Rating Drivers
Oragroup's Long-Term IDR is driven by its standalone creditworthiness, as expressed by its VR. The VR reflects the group's modest regional franchise and earnings, acceptable funding and liquidity profile, plus weak regulatory capitalisation and leverage. It also reflects a high burden of impaired loans that constrains its asset quality and increases risks to capital due to weak coverage of impaired loans.
The RWN on the VR reflects a high likelihood of a downgrade if the group is unable to remedy the breach of its regulatory capital requirements.
Regulatory Capital Ratios Breached: Oragroup's common equity Tier 1 (CET1) and total capital ratios (under local GAAP) fell to 5.5% and 7.6%, respectively, at end-1H22, below the regulatory minimum requirements of 7.5% and 11.25% after an increase in RWAs as a share of total assets (end-1H22: 50%; end-2021: 33%). The timely resolution of regulatory capital buffers is uncertain, and may require capital injections from shareholders. Tangible leverage was also weak (end-2021: 3.3%). Capital remains vulnerable to high capital encumbrance by net impaired loans (end-2021: 125% of CET1 capital, down from 199% at end-2020).
VR Equalised with 'Group VR': Oragroup is a Togo-based non-operating bank holding company (BHC) and its VR is equalised with the 'group VR' despite high common-equity double leverage (end-1H22: 130%) as BHC liquidity is sufficient and fungibility of capital and liquidity within the group is adequate.
Weaker Operating Environment: The group's operations are concentrated in weak operating environments, which weigh on its standalone creditworthiness. Global risks, US monetary policy tightening and high inflation will weaken regional growth prospects.
Modest Regional Franchise: Oragroup has subsidiaries in 12 francophone African countries and assets of USD7 billion at end-2021, which is small compared with other regional banking groups. Earnings diversification is underpinned by its geographic footprint and significant non-interest income, which represented 45% of operating income in 2021 and largely comprises fees. The group's business profile risks being hit by weaker growth due to capital constraints.
Limited FX Risks: Foreign-exchange (FX) risks are mitigated by the concentration of the group's activities in countries that use the CFA franc, which is pegged to the euro and therefore offers greater FX stability than is typical of frontier-market currencies. At end-2021, over 90% of the group's balance sheet was denominated in CFA francs, its reporting currency.
Weak Asset Quality: The group's impaired loan (Stage 3 under IFRS) ratio improved to 16.3% at end-1H22 (end-2021: 17%; end-2020: 20.4%) but remains high and sensitive to weakening operating conditions. A large proportion of impaired loans are legacy problem loans, which are slow to resolve given strict regulations. Total reserves coverage (end-1H22: 50% of impaired loans) is low and remains a threat to solvency.
Modest Profitability: Oragroup's annualised operating profit was 1.7% of RWAs in 1H22 (down from 2% in 2021 due to the increase in RWAs), supporting moderate internal capital generation. Solid fee revenue underpins the group's earnings, which however are constrained by high credit costs (2021: 55% of pre-impairment operating profit).
Acceptable Funding and Liquidity Profile: The majority of funding comprises local-currency customer deposits, including low-cost current and savings accounts. However, Oragroup has a high reliance on central-bank funding and its access to wholesale-funding sources is sensitive to market conditions. Liquidity access is dependent on repo markets.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Oragroup's ratings would likely result from a persistent breach of regulatory capital requirements that remains unaddressed, increasing risk of failure. Tightening of liquidity due to a covenant breach could also be credit-negative.
The ratings may be notched off the 'group VR' if persistent high double leverage is not offset by prudent BHC liquidity management.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The VR and Long-Term IDR may be affirmed if Oragroup restores its capital ratios to levels above regulatory requirements, or if it establishes a clear path towards achieving compliance, reducing risks to solvency and liquidity.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Oragroup's GSR of 'ns' reflects our opinion that support for the BHC cannot be relied upon from any sovereign authority. Fitch believes that some of the group's key banking subsidiaries could be supported by their respective national authorities, but such support is unlikely to extend to the BHC itself.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The GSR is unlikely to be upgraded as we believe it is highly unlikely that sovereign authorities' propensity to provide support to the BHC will increase.
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 disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on Oragroup, either due to their nature or the way in which they are being managed by the Oragroup. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg
ORAGROUP SA 
