Nigeria: Fitch Upgrades FirstBank to ‘B’; Outlook Stable; Emphasises Growth indices including Improved Capitalisation and Asset Quality

Fitch Ratings has upgraded FBN Holdings Plc’s (FBNH) and First Bank of Nigeria Ltd’s (FBN) Long-Term Issuer Default Ratings (IDRs) to ‘B’ from ‘B-‘. The Outlooks are Stable. Fitch has also upgraded their Viability Ratings (VR) to ‘b’ from ‘b-‘

The upgrade of the Long-Term IDRs follows that of the VRs, reflecting that corporate governance irregularities publicly raised by the Central Bank of Nigeria (CBN) in April 2021, including two longstanding related-party exposures, have largely been addressed and therefore risks to capitalisation have receded, helped by strong internal capital generation since the irregularities were raised.

Fitch has withdrawn FBNH’s and FBN’s Support Ratings and Support Rating Floors as they are no longer relevant to the agency’s coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned Government Support Ratings (GSR) of ‘no support’ (ns) to both issuers.

Key rating drivers

• The rating agency listed kay rating drivers to include, Equalised with Group VR: FBNH is a non-operating bank holding company (BHC). Its VR is equalised with the group VR, derived from the consolidated risk assessment of the group, due to the absence of double leverage and high fungibility of capital and liquidity. As the main operating entity, FBN’s VR is also equalised with the group VR.
• Governance Irregularities Addressed: According to management, the two related-party exposures highlighted by the CBN, which included equity and credit exposures to two companies of whom FBNH’s previous chairman was also chairman, have largely been disposed of and repaid. Fitch understands from management that FBNH and FBN have not been subject to penalties in relation to irregularities raised by the CBN in April 2021 and no further irregularities have been raised.
• Strong Franchise: FBN is the third-largest bank in Nigeria, representing 11% of domestic banking-system assets at end-2021. A strong franchise supports a stable funding profile and a low cost of funding. Revenue diversification is strong, with noninterest income representing 48% of operating income in 2021.
• Material Credit Concentrations: Single-borrower credit concentration is material, with the 20-largest loans representing 157% of Fitch Core Capital (FCC) at end-1H22. Oil and gas exposure (30% of net loans at end-2021) is higher than the banking-system average and weighted towards higher-risk upstream and services sub-segments.
• Improved Asset Quality: FBN’s impaired loans (Stage 3 loans under IFRS 9) ratio has declined significantly to 5.6% at end-1H22 from a peak of 25% at end-2018 as a result of sizeable write-offs, successful restructurings and recoveries and, more recently, the flattering effect of strong loan growth. Stage 2 loans remain significant (15% of gross loans at end-1H22) but Fitch expects these to decline as oil and gas exposures return to performing status. Specific loan loss allowance coverage of impaired loans (49% at end1H22) is acceptable in view of its collateral levels.
• Healthy Profitability: FBNH delivers healthy profitability, as indicated by an operating return on risk-weighted assets (RWAs) averaging 2.6% over the past four years (4% in 2021, underpinned by large recoveries on a previously written-off loan). Earnings benefit from a low cost of funding and strong non-interest income but are constrained by a high cost-to-income ratio (74% in 2021) and significant loan impairment charges (LICs) in recent year
• Improved Capitalisation: FBNH’s FCC ratio (19.1% at end-1H22) has been on an upward trend in recent years, as a result of strong internal capital generation, which has been influenced by a modest dividend payout ratio. Impaired loans net of specific loan loss allowances has declined as a share of FCC in recent years to a moderate 12% at end-1H22. Pre-impairment operating profit is sizeable (an annualised 5.1% of average gross loans in 1H22), providing a reasonable buffer to absorb LICs without affecting capital.
• Stable Funding Profile: FBN’s customer deposit base (76% of total funding at end1H22) comprises a high share of retail deposits (64% at end-2021) and current and savings accounts (81% at end-1H22), supporting funding stability and a low cost of funding. Depositor concentration is fairly low. Liquidity coverage is comfortable in local and foreign currencies.
• No Support: Government support to commercial banks cannot be relied on given Nigeria’s weak ability to provide support, particularly in foreign currencies. The GSR is therefore ‘no support’, reflecting our view that senior creditors cannot rely on receiving full and timely extraordinary support.
• Fitch has also upgraded the issuers’ National Long-Term Ratings to ‘A(nga)’ from ‘BBB(nga)’, reflecting their improved creditworthiness relative to that of other issuers in Nigeria

What you must know

• International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.
• The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
• FBNH’s and FBN’s ESG Relevance Score for corporate governance has been changed to ‘3’ from ‘4’, reflecting agency view that corporate governance irregularities publicly raised by the CBN have been addressed without penalty and therefore the factor is no longer relevant to their ratings.