The recent furore surrounding the viability of foremost financial institution, First Bank of Nigeria Ltd. (FBN) seems to have taken a turn for the worse with the company’s Fitch Ratings dropping to B -.
1st News reports that the B- rating was also extended to FBN Holdings Plc (FBNH).
In layman terms, the outlooks are negative for both financial institutions.
Fitch Ratings Inc. is an American credit rating agency. It is one of the three major recognized statistical rating organizations designated by the U.S. Securities and Exchange Commission in 1975.
The Negative Outlooks for First Bank primarily reflect corporate governance weaknesses highlighted by the Central Bank of Nigeria (CBN) in April 2021, pertaining to long-standing and problematic related-party exposures at FBNH. This was disclosed in a statement released by Fitch Ratings Inc. on its website.
”We understand that these issues have not yet fully been resolved by FBNH, which creates uncertainty surrounding further remedial actions that CBN may impose and puts pressure on the ratings.
“In light of the latter, and given FBNH’s limited headroom above minimum capital requirements and thin capital buffer to absorb potential shocks, its weak capitalisation also drives the Negative Outlook,” the statement revealed.
1st News reports that the CBN had removed the non-executive directors from the boards of First Bank and FBN Holdings in April 2021. The CBN had replaced them with its own appointees; with the apex bank disclosing that its actions were in the interest of financial stability and minority shareholders.
In a statement released to the media, CBN Governor, Godwin Emefiele revealed that the action was taken because the management of First Bank made significant executive management changes; including replacing the CEO, without its prior notice or approval. In addition, the CBN pointed out corporate governance failings pertaining to long-standing and problematic related-party exposures; as well as failure to comply with regulatory directives.
Consequently, the development has impacted on the bank’s negative rating.
”FBNH is the non-operating holding company that owns FBN. FBNH’s ratings are aligned with those of FBN, its main operating subsidiary. FBN’s ratings are driven by its standalone creditworthiness. Currently, FBN represents around 90% of consolidated group assets,” Fitch stated
”FBNH’s Long-Term IDR is driven by its intrinsic creditworthiness, as defined by its ‘b-‘ Viability Rating. The VR considers the group’s exposure to Nigeria’s volatile operating environment, given the impact on its financial metrics. The Negative Outlook is driven by corporate governance weaknesses, which we consider to be a factor of high importance to the VR; along with modest headroom above the minimum regulatory capital requirements.”
In addition, the bank’s problematic loan profile, poor capitalization and profitability, among others; were cited as major factors in its negative rating. Fitch says the bank is currently under-performing compared to its peers.
”Loan quality remains a weakness compared with peers, although net loans were a low 32% of assets at end-1H21.
”FBNH’s impaired loan ratio (Stage 3 under IFRS 9) further improved to 7.6% at end-1H21; from a peak of 25.8% at end-2018, primarily reflecting write-offs, repayments and recoveries. However, as a result of the write-offs, coverage of impaired loans by loan loss allowances fell to 47% (end-2018: 72%); one of the lowest levels among peers. We expect FBNH’s impaired loan ratio to continue declining steadily in the near term due to rapid loan growth and recoveries. Our assessment also captures FBNH’s sizeable Stage 2 loan book; which we estimate brings total problem loans (Stage 2 and Stage 3 combined) to around 33% of total loans at end-1H21; a notably higher level than peers.
”Our assessment of FBNH’s asset quality captures the group’s sizeable investments in Nigerian government securities (B/Stable) and cash placements; which together represented around 50% of total assets, equal to nearly 6 times Fitch Core Capital (FCC).
”FBNH’s profitability metrics typically lag behind those of other large banks. Its operating profit/average total assets ratio was 1.2% (annualised) in 1H21, compared with the sector average of 2%, reflecting high loan impairment charges equal to 35% of 1H21 pre-impairment profit. Nevertheless, FBNH’s earning capacity remains sound, underpinned by below-sector-average funding costs, highlighting the group’s solid competitive position.
”Capitalisation is a rating weakness. FBN’s (bank-solo) total capital adequacy ratio of 15.7% at end-1H21 (excluding profit for the period), provided only a 70bp buffer above its minimum regulatory requirement. Capitalisation metrics remain vulnerable to asset quality risks, given fairly high unreserved impaired loans (equal to 15% of FCC) and the bank’s sizeable stage 2 portfolio, on which provisions are very low.
Funding and liquidity are a relative rating strength. FBNH’s liquidity profile in local currency is strong by domestic standards, with a Fitch-calculated loans/customer deposits ratio of 52% at end-1H21 (end-2020: 47%). Local currency liquidity is ample, with excess liquidity placed in government securities. In addition, the group has historically benefited from good access to external funding,” the statement read in part.