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Moody’s report sees Diamond Bank’s solvency crisis deepening

Though the Diamond Bank Plc management had denied any form of talks bordering on either buy over or mega loan discussions with any other bank in Nigeria over revelation of its solvency status, the baseline credit assessment (BCA) and adjusted BCA of Diamond Bank Plc have been downgraded from caa3 from caa1 by Moody’s Investors Service.
Industry analysts say such downgrading portends danger for the financial institution considering the implications to capital adequacy ratio and other critical bank ranking profiles.
The Central Bank of Nigeria (CBN) is yet to make a clear statement on the true solvency status of the bank since the crisis begun.
Besides, the Moody’s Investors Service, foremost global rating agency explained that the action was as a result the Diamond Bank’s weakened solvency, governance tensions and foreign currency liquidity challenges.
“In Moody’s view, the bank will face a further deterioration of its solvency that will likely undermine investor confidence and make foreign currency funding increasingly costly and difficult to access, or the bank will receive external capital support from either existing or new shareholders, or from the government, boosting its solvency and addressing its foreign currency vulnerability,” the statement said.
Moody’s said its previous assignment of a positive outlook on Diamond Bank’s deposit ratings in June 2018 had been based on expectations of substantial NPL reduction in the following 12 months; however, Moody’s said it now expects NPLs and provisioning needs to remain high.
Diamond Bank’s NPLs ratio stood at about 40 percent of gross loans as of September 2018 from 42 percent at year-end 2017, and only about 20 percent of the NPL stock is covered by provisions. Moody’s estimates that the provisioning requirements currently outsize the bank’s TCE.
“A second driver for the downgrade is the weakened corporate governance of the bank, following the recent unexpected departure of the bank’s chairman and three members of the board of directors. This development reveals tensions that the rating agency expects will delay the resolution of the bank’s large portfolio of NPLs and could potentially undermine investor confidence in the ability of the bank’s management to turn around Diamond Bank’s financial performance.”
The third is also related factor for the downgrade is Diamond Bank’s vulnerable foreign currency funding profile. The rating agency views the risk that the weak solvency and corporate governance tension may erode customer and depositor confidence, further impairing the bank’s financial performance and negatively affecting Diamond Bank’s funding profile.
“The bank will face significant refinancing needs in the first half of 2019, including a $200 million Eurobond maturing in May 2019.

Diamond Dozie
Group Managing Director of Diamond Bank Plc, Mr. Uzoma Dozie

“Diamond Bank’s liquid foreign currency assets at year-end 2017 amounts to about 25 percent of the debt and borrowings that are maturing in 2019, and the bank is currently looking at various market options to meet its foreign currency funding needs,” the rating firm said.
Explaining more on the downgrading of the ratings, Moody’s averred that “The primary driver for the two-notch downgrade of Diamond Bank’s BCA to caa3 is Moody’s view that the lack of progress in resolving NPLs adds pressure on its already weak solvency profile.”
Business Hilights gathered further that the rating firm downgraded Diamond Bank’s long-term local currency and foreign currency deposit ratings to Caa1 from B3.
However, Diamond Bank’s Not Prime (NP) short-term local and foreign currency deposits and counter party ratings and NP(cr) short-term counter party risk assessments have been affirmed, Moody’s said.
The rating agency also observed that “Moody’s action follows the departure of Diamond Bank’s chairman of the board and three other non-executive board members, and the subsequent announcement of the bank’s third quarter financial results which showed a lack of progress in reducing problematic exposures, in contrast with the improvements that the rating agency had expected.
“The downgrade reflects Diamond Bank’s (1) weak solvency that is characterised by low provisions set aside for its high level of non-performing loans (NPLs) that outsize its tangible common equity (TCE), (2) corporate governance tensions that will likely divert management’s focus from resolving NPLs and could potentially undermine investor confidence, and (3) vulnerable foreign currency repayment obligations in 2019,” Moody’s averred.