(Ecofin Agency) - With shrinking safety margins, greater exposure to sovereign risks, and declining profitability, the West African banking group is in an increasingly difficult position. Without swift action, either through a capital injection or new external financing, Fitch warns that the likelihood of default is becoming more and more realistic.
Fitch Ratings has downgraded Oragroup’s rating once again, dropping it from “CCC-” to “CC,” signaling a higher risk of default. The downgrade, announced on September 25, 2024, follows a previous one in April, as the West African bank faces a prolonged liquidity crisis and stricter regulatory demands.
Fitch highlighted Oragroup’s troubling liquidity situation. The bank’s holding company is set to face major debt payments in October 2024, but its current financial resources are insufficient to meet these obligations without external financing. If the bank defaults on its senior creditors, Fitch warns it could trigger massive deposit withdrawals from Oragroup’s subsidiaries, which operate in 12 African countries.
Fitch’s downgrade is also tied to Oragroup’s ongoing struggle to meet capital requirements. The bank’s capital ratios have worsened over several quarters. Its core capital ratio (Common Equity Tier 1 -CET1) was just 2.3% at the end of 2023, far below the required 7.9%. The CET1 is a crucial measure of a bank’s ability to absorb losses. The situation worsened after a reassessment of risks tied to certain loans, forcing Oragroup to allocate more capital to cover these risks, further weakening its financial position.
Fitch expressed concern over the bank’s inability to strengthen its capital. The bank's heavy exposure to risky sovereign funds in West and Central Africa has made it extremely vulnerable. At the end of 2023, the 20 largest loans accounted for 231% of Oragroup’s capital. This concentration of credit risk, along with a high proportion of non-performing loans (20% of total loans in 2023), increases the bank’s vulnerability to economic shocks. Oragroup also holds significant public debt from high-risk West and Central African nations.
Another key factor behind the downgrade is the uncertainty surrounding Oragroup’s recapitalization attempts. The bank had planned to recover by selling a majority stake to Vista Bank. However, the deal, announced in August 2023, has not been finalized due to additional requirements from the WAEMU Banking Commission, which demanded more guarantees before approving the transaction. Faced with this hurdle, some shareholders are considering abandoning the sale in favor of an internal recapitalization, a move Fitch sees as highly uncertain.
Fitch noted that while the best-case scenario would involve existing shareholders or a new investor injecting capital, Oragroup’s current financial difficulties—including a CFA18 billion loss in 2023—make this outcome uncertain. The bank will likely need “extraordinary” capital support to bridge the gap.
Oragroup’s balance sheet is further weighed down by weak profitability. The bank reported an operating return on risk-weighted assets of just 0.8% between 2020 and 2023, well below industry standards. Fitch attributes this poor performance to high costs and rising loan impairment charges, which contributed to last year’s significant net loss.
According to Fitch, Oragroup’s options are limited. While some subsidiaries could potentially receive government support, Fitch believes this assistance is unlikely to extend to the holding company, complicating the bank’s recovery prospects.