Apr 2020 Financial News

Two Trinidadian Banks Downgraded To 'BBB-/A-3' From 'BBB/A-2' On Lower Hydrocarbon Prices And COVID-19 Outbreak

Apr 03, 2020

Overview

• On March 26, 2020, we lowered our long-term foreign and local currency sovereign credit ratings on Trinidad and Tobago (T&T) to 'BBB-' from 'BBB' given lower oil and gas prices assumptions over the next several years.
   
• As a result, we're lowering our long-term and short-term issuer credit ratings on Republic Bank Ltd. (Republic Bank) and on First Citizens Bank Ltd. (First Citizens) to 'BBB-/A-3' from 'BBB/A-2'.
   
• Moreover, we revised our trend on the country's Banking Industry Country Risk Assessment (BICRA) economic risk to negative from stable, because we expect pressure on banks' asset quality to surge and business growth to slow as the coronavirus outbreak hits trade and lower oil prices contribute to a deeper economic contraction and increasing unemployment. The trend on industry risk remains stable.
   
• As a result, the negative outlook on both banks reflects our view for the next 12-24 months that a more prolonged economic contraction could harm domestic companies' finances and cause unemployment to rise, which in turn would dent banks' asset quality and operating performance in the medium term.

Rating Action

On April 1, 2020, S&P Global Ratings lowered its long-term issuer credit ratings on Republic Bank and First Citizens to 'BBB-' from 'BBB'. At the same time, we lowered our short-term ratings on both entities to 'A-3' from 'A-2'. The outlook on both banks is now negative.

Furthermore, we're keeping our BICRA on T&T at group '6'. On the other hand, we're revising the BICRA's economic risk trend (currently at '7') to negative from stable, and maintaining our industry risk score at '5' with a stable trend. The anchor for banks operating only in T&T remains at 'bb+'.

Rationale

The downgrade of Republic Bank and First Citizens mirrors the action on the sovereign ratings. On March 19, 2020, S&P Global Ratings substantially lowered its oil assumption for 2020 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure,"). Although T&T's banks are not heavily exposed to oil companies, economy is heavily dependent on the energy sector, which has historically contributed over a third to the
government's revenue and the country's real GDP, and over 80% of its exports. As a result, we expect lower hydrocarbon prices will cause T&T's economy to shrink 2.7% for 2020, continuing the contraction in the country's real GDP per capita over the past several years. We forecast that real GDP per capita will fall to about $16,600 in 2020, down more than 19% than the 2014 level.

Moreover, we see increasing challenges to banks amid the recession and the coronavirus outbreak. It's currently uncertain when the spread of COVID-19 will cease because it's still at its early stage, and how deep the economic strain it will cause, because there are no empirical rules to estimate how social distancing could affect key economic variables. T&T's government deems banking services as essential during the quarantines that recently started, while other business activities are shut down.

Still, we expect pressure on banks' asset quality to surge and business growth to slow as the coronavirus outbreak hits trade and lower oil prices contribute to a deeper economic contraction. As public health crisis disrupts production and the plunge in consumption interrupts the payment chain, some companies and individual borrowers will have difficulty with debt repayment.

Therefore, we expect T&T's banking system to shift from a slight expansionary phase into the one of correction, but with a limited impact up to this point because we expect credit losses to remain manageable. Banks were able to contain the damage to asset quality in the past years of recession amid weak energy prices but relatively low unemployment and inflation rates.

Nevertheless, we believe that a consecutive contraction of economy since 2015 could impair companies' finances, while the rising unemployment could hinder the individual borrowers' ability to service their loans.

On the other hand, we expect the regulatory and governmental measures to mitigate this risk to some extent. Local commercial banks are renegotiating existing loans to customers, whose finances have been crimped by the pandemic, waiving fees for some products and reducing interest rates on credit cards. We believe the full impact on asset quality will take time to materialize, given the regulatory and banks' measures to lessen the strain.

Furthermore, the central bank has reduced the reserve requirements for commercial banks to 14% from 17% and its policy rate by 150 basis points to 3.5% to support the system's liquidity. In our view, the banks' funding structure, which mainly consists of customer deposits, will partly help compensate for a restricted access to capital markets. We expect more initiatives to provide cash flow relief to clients in the short term, although the stabilization of lenders' balance sheets will depend on the length of the paralysis in business activity and its effect on economic growth.

Outlook

First Citizens
The negative outlook on First Citizens for the next 12-24 months reflects our view that a rising credit stress amid the COVID-19 outbreak and lower oil price prospects could erode the bank's asset quality and operating performance. As a government-owned bank, we expect First Citizens to play a key role by stepping up financing to the most vulnerable economic sectors.

Downside scenario
We could lower the ratings on First Citizens, if we were to revise T&T's BICRA to a weaker score to incorporate higher economic risks in the domestic economy that would weigh on banks and lower the anchor to rate local banks. Moreover, in this scenario, we expect that the bank's risk-adjusted capital (RAC) ratio to consistently drop below 15% given a potential increase in our assessment of assets' risk charges for the country or elevated credit losses, which could prompt to revise our capital assessment on the bank to a lower category.

Upside scenario
An upgrade of the bank is unlikely at this point, given that it would require a sovereign upgrade, which is not in our base-case scenario.

Republic Bank
The negative outlook on Republic Bank for the next 12-24 months reflects our view that a rising credit stress amid the COVID-19 outbreak and lower oil price prospects could erode the bank's asset quality and operating performance. We expect the organizational structure in place since 2015 to help the bank avoid credit stress contagion from its subsidiaries abroad.

Downside scenario
We could lower the ratings on Republic Bank if we were to revise T&T's BICRA to a weaker category to incorporate higher risks in the domestic economy that would weigh on banks and lower the anchor to rate local banks. Moreover, in this scenario, we expect that the bank's RAC ratio to consistently drop below 10% given a potential increase in our estimates of assets' risk charges for the country or elevated credit losses, prompt to revise our capital assessment on the bank to a lower category.

Upside scenario
An upgrade of the bank is unlikely at this point, given that it would require a sovereign upgrade, which is not in our base-case scenario.


Source:
S&P Global Ratings
Friday 3rd April, 2020