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Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) of FBN Holdings Plc (FBNH) and its subsidiary, First Bank of Nigeria Ltd, at ‘B-‘.
But the rating agency in a recent statement assigned the financial institutions negative outlooks.
According to the global rating agency, the negative outlooks primarily reflected the corporate governance weaknesses highlighted by the Central Bank of Nigeria (CBN) in the financial institutions in April 2021, pertaining to long-standing and problematic related-party exposures at FBNH.
“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 added.
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 per cent of consolidated group assets.
“FBNH’s long-term IDR is driven by its intrinsic creditworthiness, as defined by its ‘b-‘ Viability Rating (VR). 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,” it added.
Fitch pointed out that operating conditions in Nigeria were gradually stabilising. Therefore it forecasted a 1.9 per cent Gross Domestic Product (GDP) growth for the country in 2021, following a 1.8 per cent decline in 2020.
“Our baseline scenario is that business volumes and earnings should continue to rebound in 2021, while the rally in oil prices is also a positive factor. Nevertheless, downside risks linger, given the inherently volatile market conditions, with banks still exposed to foreign-currency shortages, potential further currency devaluation, rising inflation and regulatory intervention by the CBN,” it added.
In April 2021, the CBN removed the non-executive directors from the boards of FBNH and FBN – a domestic systemically important bank – and replaced them with its own appointees. The CBN stated then that its actions were in the interest of financial stability and minority shareholders. It further stated that it acted because FBN had made significant executive management changes, including replacing the CEO, without prior notice or approval of the regulator.
The CBN had also highlighted corporate governance failings pertaining to long-standing and problematic related-party exposures, and failure to comply with regulatory directives.
“Loan quality remains a weakness compared with peers, although net loans were a low 32 per cent of assets at end of first half 2021.
“FBNH’s impaired loan ratio (Stage 3 under IFRS 9) further improved to 7.6 per cent at the end of first half 2021, from a peak of 25.8 per cent as at the end of 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 per cent (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 per cent 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),” it stated.
According to Fitch, FBNH’s profitability metrics typically lag behind those of other large banks.
“Its operating profit/average total assets ratio was 1.2 per cent (annualised) in first half 2021, compared with the sector average of two per cent, reflecting high loan impairment charges equal to 35 per cent of first half 2021 pre-impairment profit. “Nevertheless, FBNH’s earning capacity remains sound, underpinned by below-sector-average funding costs, highlighting the group’s solid competitive position,” it stated.
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