Reviews & Outlooks | |
Reviews & Outlooks | |
946 VIEWS | |
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Monday, October 05, 2020 / 06:02
PM /by Fitch Ratings / Header Image Credit: FBN Holdings Plc
Fitch Ratings has affirmed the Long-Term Issuer
Default Ratings (IDRs) of FBN Holdings
Plc (FBNH) and its primary operating subsidiary, First Bank of Nigeria Ltd
(FBN), at 'B-', and removed them from Rating Watch Negative (RWN). The Outlooks
are Negative.
The removal of the RWN from FBNH's and
FBN's Long-Term IDRs, Viability Ratings (VRs) and National Ratings reflects
Fitch's view of receding near-term risks to the bank's credit fundamentals from
the economic fallout arising from the oil price crash and coronavirus pandemic.
In our opinion the impact of the economic downturn on FBNH's and
FBN's credit profiles is largely contained at their current rating level and it
will take several quarters before the full extent of the crisis on corporates
and households is seen in its financial metrics. Since the previous rating
action in March, regulatory forbearance on asset classification and banks' own
debt-relief measures have significantly eased sector asset quality pressures.
Debt relief measures are, nevertheless, temporary and with the eventual easing
of fiscal and monetary support from the Central Bank of Nigeria (CBN), there
remains a material risk that bank asset quality could deteriorate faster,
unless economic recovery gathers pace.
The Negative Outlooks on FBNH's and FBN's Long-Term
IDRs reflect our view of sustained downside risks to the operating environment,
the heightened level of risk in doing banking business, resulting in risks to
its capital, and ongoing pressures on the bank's asset quality and earnings
over the next 12-18 months.
Key Rating Drivers
IDRS and VR
FBNH is the non-operating holding company that owns
FBN. FBNH's ratings are aligned with those of FBN, its main operating
subsidiary (which represents around 90% of consolidated group assets at
end-2019) due to high capital and liquidity fungibility within the group as
well as low double leverage (at 95% at end-1H20) at the holding company level.
The IDR of FBNH is driven by its intrinsic
creditworthiness, as defined by its 'b-' VR. The VR considers the group's
exposure to Nigeria's volatile operating environment and also factors in
vulnerability in its capital position in the context of moderate earnings
generation and asset-quality pressures, when headroom above the minimum
regulatory capital requirements is also moderate. Capital adequacy is a factor
of high importance to the VR.
The credit quality of the loan book (net loans were
28% of assets at end-1H20) remains a weakness compared to peers. However,
FBNH's impaired (Stage 3 under IFRS 9) loan ratio improved to 9.2% at end-1H20
from its peak of 25.8% at end-2018, primarily due to write-offs and, more
recently, debt-relief measures and regulatory forbearance. As a consequence of
write-offs, loan-loss coverage of impaired loans has fallen to 41% at end-1H20
from 72% at end-2018, which is significantly lower than the average for
Fitch-rated Nigerian banks (around 90% at end-1H20).
Our assessment also captures FBNH's sizeable book of
Stage 2 loans, which we estimate brings its problem loans (Stage 2 and Stage 3
combined) to around 44% of total loans, a notably higher level than for peers.
Our assessment of FBNH's asset quality captures the group's sizeable
investments in Nigerian government securities (Nigeria's Long-Term IDR is 'B'
with Stable Outlook) and cash placements, which together represented around 50%
of total assets at end-1H20.
As for the sector, we believe that the credit quality
of FBNH's loan book will deteriorate over several quarters due to the impact on
customers from the recession, currency devaluation, US dollar shortages and
distress in certain key industry segments - especially the oil sector, which
represented a high 30% of loans at end-1H20, or around 90% of Fitch Core
Capital (FCC). We expect FBNH's loan book to continue growing at a steady pace
over the next 12-18 months (1H20: 7%, year-to-date), which will somewhat
cushion the impact of rising impaired loans. This supports our view of a
moderate increase in the bank's impaired loan ratio in the near term.
FBNH's profitability metrics typically lag behind
those of the other large banks, as shown by an annualised operating
profit/average total assets ratio of 1.2% in 1H20, compared to a sector average
of 2.3%. This is mainly due to high loan impairment charges consuming 42% of
pre-impairment profits in 1H20. That said, FBNH's funding costs remain low
compared to the sector, which highlights the group's strong competitive
position.
Capitalisation is a relative rating weakness and has a
high influence in the ratings. FBN's (bank-solo) total capital adequacy ratio
(CAR) of 16.8% at end-1H20 (excluding profit for the period) was moderately
above the 15% minimum regulatory requirement. However, the bank's CAR increased
noticeably from 15.7%, including full-year profit, at end-2019, thanks to an
equity injection from FBNH after the sale of the group's stake in its insurance
subsidiary. In our view, capitalisation metrics remain vulnerable to
asset-quality risks, with FBNH's unreserved impaired loans at a fairly high 16%
of FCC at end-1H20 - when provisioning rates in the bank's sizeable stage 2
portfolio were low.
FBNH's liquidity profile in local currency is strong,
with a Fitch-calculated loans/customer deposits ratio of 47.4% at end-1H20
(end-2019: 48%). Local-currency liquidity is ample, with excess liquidity
placed in government securities. The group's funding in foreign currency
remains largely short-term on a contractual basis, exposing it to maturity
mismatches, with customer deposits representing the bulk of the short-term
commitments. That said, behavioural data suggests that foreign currency funding
is more stable. In addition, the group has significant contingent funding
sources and has historically benefitted from good access to external funding.
Support Rating and
Support Rating Floor
Sovereign support to banks cannot be relied on given
Nigeria's weak ability to provide support, particularly in foreign currency.
The Support Rating Floor of all Nigerian banks is 'No Floor' and all Support
Ratings are '5'. This reflects our view that senior creditors cannot rely on
receiving full and timely extraordinary support from the Nigerian sovereign if
any of the banks become non-viable.
National Ratings
FBNH's and FBN's National Ratings reflect their creditworthiness
relative to other issuers in Nigeria and are driven by their standalone
strength. They are lower than the highest-rated Nigerian peers due to FBNH's
and FBN's comparatively weaker asset quality metrics and solvency levels.
Rating Sensitivities
Factors that could, individually or collectively, lead
to positive rating action/upgrade:
Upside to the ratings is unlikely at present but could
come from a material improvement in operating conditions and a sovereign
upgrade. The Outlook could be revised to Stable if the vulnerability of FBN's
modest capitalisation to asset quality risks eases. This would be evidenced by
a marked decrease of the stock of FBNH's unreserved impaired loans relative to
capital.
Positive rating action, such as an upgrade or a
revision of the Outlook to Positive, would result from a narrowing of the gap
between the large Nigerian banks' financial metrics and those of FBNH. This
would result from a reducing share of Stage 2 and Stage 3 loans, combined with
a marked increase in the coverage of impaired loans by loan-loss allowances.
Factors that could, individually or collectively, lead
to negative rating action/downgrade:
Negative rating action on the sovereign and/or if our
assessment of the operating environment being revised downwards. The latter
could be driven by persisting post-lockdown disruption, weak oil price and
extended global economic turmoil, giving rise to a more severe economic and
financial market fallout than currently expected.
Renewed deterioration in FBNH's asset-quality metrics,
which could be indicated by a rise in the combined Stage 2 and Stage 3 loans
ratio to above 50%, driving large bottom-line losses and regulatory capital
ratios, falling below regulatory minimum.
A severe tightening in the bank's foreign currency
liquidity could also lead to negative rating action.
The ratings of FBNH could be downgraded following a
significant increase in its double leverage to above 120% for a sustained
period of time or if liquidity and capital fungibility within the group was
hampered in any way.
Best/Worst Case Rating
Scenario
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.
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