Jaiz Bank, a leading Islamic finance institution in Nigeria, is facing concerns regarding its asset quality, according to a recent ratings note by Fitch Ratings. The rating agency has affirmed Jaiz Bank’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook, as well as its Viability Rating (VR) at ‘b-‘. The bank’s National Long-Term Rating has been affirmed at ‘BBB+(nga)’ with a stable outlook. However, Fitch Ratings highlights the challenges faced by Jaiz Bank in terms of asset quality.
Fitch attributes Jaiz Bank’s ratings to its standalone creditworthiness, as reflected by its ‘b-‘ VR. However, the bank’s viability rating is constrained by several factors, including its concentration of operations in Nigeria’s challenging operating environment, its relatively small market share, weak revenue diversification, and asset quality pressures.
The ratings note acknowledges that Jaiz Bank has shown stronger profitability and a more stable funding profile compared to its peers. It also mentions that the bank’s President, Tinubu, has implemented key reforms more quickly than anticipated, such as the removal of fuel subsidies and the liberalization of the Nigerian naira. While these reforms are positive for the country’s credit profile, they pose near-term challenges such as inflationary pressures and social unrest. Fitch Ratings also predicts that the sharp depreciation of the naira will negatively impact banks’ capital ratios.
Despite being a leader in the Islamic finance sector in Nigeria, Jaiz Bank has a relatively small market share in the domestic banking system, accounting for only 0.5% of the market at the end of 2022. Fitch Ratings points out that the bank’s lending is concentrated, with its 20 largest customers representing 38% of its gross financing assets in 2022. Additionally, the bank has a relatively high exposure to the agriculture and related industries, which are considered higher-risk sectors, accounting for approximately 36% of its total financing at the end of 2022.
The ratings note also emphasizes that Jaiz Bank faces asset quality pressures due to its aggressive growth strategy. Fitch Ratings notes that the bank has significantly increased its financing assets in recent years, which poses risks to the quality of its assets. In 2022, the bank’s impaired financing ratio rose to 9.7% from 5.9% due to economic challenges and seasoning of its financing portfolio. However, the bank’s specific loss coverage for impaired financing assets was 47% at the end of 2022, supported by collateral. Despite these challenges, Jaiz Bank remains profitable in the sector, with an operating return of 5.3% of risk-weighted assets (RWAs) in 2022.
While the bank’s profitability has improved in recent years, Fitch Ratings notes that its revenue diversification is limited due to its Islamic banking business model. Nevertheless, Jaiz Bank has good capitalization and is among the highest in terms of capital position in the banking sector. Its low-risk weighted asset density of 34% benefits from an Islamic bank-specific discount of 50% to its RWAs, providing a significant buffer to absorb impairment charges without affecting its capital. Furthermore, the bank’s capitalization is less sensitive to the direct effects of naira depreciation compared to its peers, as it has a relatively small share of foreign-currency assets in its total assets.
Jaiz Bank’s funding profile is characterized by a high percentage of current and savings accounts, which accounted for 87% of customer deposits in 2022. Deposits from individuals represent 65% of these accounts, providing funding stability and low funding costs for the bank. The bank’s depositor concentration is moderate, with the 20 largest depositors accounting for 17% of total customer deposits at the end of 2022.