First Bank Lowered to 'B-/C' On Weak Asset Quality and High Credit Losses


Friday, June 24, 2016 10:10AM /S & P Global Ratings


1.       Economic slowdown and restrictive foreign exchange policy in Nigeria has undermined domestic banks' creditworthiness.

2.      As a result, First Bank of Nigeria's (FirstBank's) asset quality has deteriorated markedly in 2015 and credit losses jumped to levels beyond our base-case expectationsWe anticipate that FirstBank's credit cost will be high in 2016, thus weakening earnings and capitalization.

3.      Therefore, we are lowering our long- and short-term global and national scale ratings on FirstBank to 'B-/C' from 'B+/B' and to 'ngBB/ngB' from 'ngA-/ngA-2', respectively, and placing the long-term ratings on CreditWatch negative.

4.      The CreditWatch placement reflects our view that the bank's financial profile could deteriorate further on the back of naira devaluation.

S&P Global Ratings today lowered its long- and short-term counterparty credit ratings on Nigeria-based First Bank of Nigeria Ltd. (FirstBank) to 'B-/C' from 'B+/B'. We also lowered our long- and short-term national scale ratings on FirstBank to 'ngBB/ngB'  from 'ngA-/ngA-2'. We placed the long-term ratings on CreditWatch with negative implications.

At the same time, we placed on CreditWatch with negative implications our 'B-'long-term global scale counterparty credit rating on FirstBank's non-operating holding company (NOHC), FBN Holdings PLC (FBNH). We lowered our long-term national scale rating on FBNH to 'ngBB' from 'ngBB+' and also placed it on CreditWatch negative. We affirmed our 'C' short-term global scale and 'ngB' short-term national scale ratings on FBNH.

The rating actions reflect our view that FirstBank will continue to exhibit comparatively weaker asset quality metrics than rated top-tier banks in Nigeria and lower earnings than its peers in 2016 due to high credit cost. The low-oil-price environment, combined with high concentration in the oil and gas sector, has undermined the bank’s revenue and earnings stability and asset quality, resulting in markedly higher nonperforming loans (NPLs) than we anticipated. We expect that moderate real GDP growth and a prolonged depreciation of the local currency will drive up credit losses in the banking system to between 3%-4% in 2016-2017 and threaten the capital position of someNigerian banks.

We observe that FirstBank has not been able to manage down some of its exposures in foreign currency, following the naira devaluation in 2014 and early 2015, and as a result exhibits weaker underwriting standards than its peers. Moreover, the bank exhibits high concentration risk: The top 20 loans accounted for 43.5% of total loans at year-end 2015, with the largest two exposures being nonperforming. As a result, we believe that FirstBank exhibits a moderate business position, stemming from lapses in risk management.

Cost of risk jumped to 5.7% at year-end 2015 from 1.3% in 2014, and NPLs increased to 18% in the same period, compared with less than 3% in 2014. More importantly, we expect cost of risk to remain high at about 5% over the next 12-18 months and NPLs to increase to around 22% compared with our estimate of 6% for the sector on average in 2016.

The weak performance of the bank’s portfolio stems from its significant concentration on foreign currency loans, particularly the oil and gas related exposures. FirstBank’s share of foreign currency lending was high at 45% of total loans in 2015.

In a context of low oil prices and a weakening naira, we expect additional impairments in 2016, which will result in additional NPLs in this segment. At year-end 2015, the bank restructured 12% of its portfolio, with the oil and gas sector accounting for 70% of the restructured portfolio. We expect FirstBank to restructure some loans, particularly in downstream oil and gas and small and midsize enterprises in 2016, on the back of the naira depreciation. The 2015 performance and huge impairments prompted the bank to launch a review of its risk-management process to improve loan approvals, risk monitoring, and collection.

As a result, we now assess the bank’s risk position as moderate compared with adequate previously.

FirstBank reduced its off-balance-sheet exposures by 50% year on year at end-2015, which resulted in an improvement of its risk-adjusted capital (RAC) ratio to 5.7%, compared with 4.6% a year earlier. However, we anticipate that our RAC ratio calculation will deteriorate to weaker levels of about 3.8%-4.0% over the next 12-18 months on the back of high impairments and naira devaluation.

Furthermore, the restrictive foreign exchange regime, as well as lower oil prices and production, has resulted in a shortage in U.S. dollars, which is undermining the banking sector's foreign currency liquidity position.

FirstBank raised U.S. dollar funding in 2013 and 2014, which should provide a natural hedge to its capitalization in the scenario of naira devaluation. However, there is a risk that the bank’s capital adequacy ratio could go below the minimum regulatory requirement of 15%, should the naira devalue beyond our base-case scenario.

The ratings on the bank reflect the overall creditworthiness of the FirstBank group, whose group credit profile (GCP) we assess at 'b-'. The bank is the core component of the group, which is at the top of the Nigerian financial services industry, with a leading deposit franchise and good naira liquidity.

Despite the bank's high systemic importance, the ratings on FirstBank reflect our assessment of the bank's core group status to the FirstBank group and its stand-alone credit profile (SACP) at 'b-'. We classify the Nigerian governmentas supportive of the domestic banking sector, but we do not add extraordinary government support to the bank's SACP.

Our long- and short-term ratings on FirstBank's holding company FBNH are at the same level as the ratings on FirstBank, at 'B-/C', reflecting the absence of debt at the holding company level. Under our criteria, we generally notch down from the GCP to reflect the NOHC's structural subordination and exposure to potential regulatory intervention. Nevertheless, in FBNH's case, we take comfort from the absence of debt at the holding company level and believe that the risk of default of the NOHC is not yet commensurate with the 'CCC' rating category. Should we see any emergence of leverage at the NOHC level, its rating will come under significant pressure.

The negative CreditWatch placement reflects our view that FirstBank’s capital adequacy ratio could fall below the minimum regulatory capital adequacy ratio in case of a devaluation of the naira beyond our base-case scenario. If such a scenario materialized, we would lower the ratings on FirstBank by one notch to'CCC+'. We could also lower the ratings on FirstBank by one notch if asset quality deteriorated further, leading to higher credit losses and NPLs than anticipated.

The negative CreditWatch placement on FBNH reflects that on the bank. We would lower our ratings on the NOHC by at least one notch if we lowered our ratings on FirstBank. In addition, we could lower the ratings on the NOHC by more than one notch if we saw any emergence of leverage at the NOHC level.

Alternatively, we could affirm the ratings on FirstBank at the current levels if the bank does not breach the minimum regulatory capital adequacy ratio upon the effective devaluation of the naira. In such a case, we would also affirm the ratings on FBNH, providing that all else remained unchanged.

We aim to resolve the CreditWatch within the next 90 days.

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