October 31, 2019 /11:26AM / By Fitch Ratings/ Header
Image Credit: The Nicheng
Fitch Ratings has revised the Outlook on the Long-Term Issuer Default Ratings (IDR) of FBN Holdings Plc (FBNH) and its primary operating company, First Bank of Nigeria Limited (FBN), to Stable from Positive and affirmed the Long-Term IDRs at 'B-'. A full list of rating actions is below.
The revision of the Outlooks reflects continuing asset quality pressure on FBNH and FBN's credit profiles and our expectation that this will take longer than previously anticipated to resolve.
Key Rating Drivers
IDRs, Viability Ratings And National Ratings
FBNH's and FBN's IDRs are driven by their standalone credit profiles, as defined by their Viability Ratings (VR). The VRs are influenced by the domestic operating environment, reflecting weak GDP growth, policy uncertainty and increasing regulatory risks.
The VRs consider FBN's company profile and its solid banking franchise, as reflected by leading market shares and the largest retail deposit base, which supports the stability of the bank's funding profile and pre-impairment profitability.
Asset quality remains a relative weakness compared with peers. Through significant write-offs, restructuring and recoveries, FBNH has made noticeable progress in reducing its impaired loan (IFRS 9 Stage 3 loans)/gross loan ratio, which was 12.6% at end-3Q19 (end-2018: 25.9%) - albeit still high compared with peers. However, our assessment of this factor also considers modest reserve coverage of impaired loans and a sizeable book of stage 2 loans, which we estimate bring problem loans (stage 2 and stage 3 combined) at around 40% of total loans, a notably higher level than peers. In our view, the performance of Stage-2 loans within the next 18 months is uncertain and will largely be driven by the recovery prospects in the oil sector.
While we recognise management's success in reducing FBNH's impaired loan ratio (FBNH guides an impaired loan ratio below 10% by end-2019), its asset quality metrics remain notably weaker than peers and also affect other rating factors.
FBN's bank-solo (unconsolidated) total Capital Adequacy Ratio (CAR) was only marginally above the 15% minimum regulatory requirement at end-3Q19, but is expected to strengthen by end-2019, when earnings are audited. Fitch also notes that when including profit for the period, the bank reported a CAR of 16.4% at end-3Q19.
Pre-impairment earnings are resilient, thanks to the group's strong domestic franchise. FBN is the oldest and third-largest bank in Nigeria, with a market share of 14% of domestic credit at end-2018. However, profitability metrics are inferior to other large Nigerian banks, predominantly as a result of high loan impairment charges in recent years.
Franchise strength is further illustrated by the group's solid funding base of low cost retail deposits, driving one of the lowest funding costs in the sector. Strong liquidity is also supported by a stable and robust deposits base. Liquidity is provided by a large book of domestic government securities.
FBNH's and FBN's National Ratings reflect their creditworthiness relative to the country's best credit and relative to peers operating in Nigeria.
Support Rating And Support Rating Floor
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria's (B+/Stable) 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.
IDRS, Support Ratings, National Ratings And Senior Debt
FBNH's and FBN's IDRs are sensitive to any change in their VRs. The Long-Term IDRs, VRs and National Ratings are sensitive to the overall improvement in asset quality, which would lead to improved profitability and capitalisation. Conversely, unexpected credit events, which would have material consequences on capital's risk-absorption capacity, would have negative rating implications.
FBNH's and FBN's National Ratings are sensitive to a change in their creditworthiness relative to other Nigerian issuers.
The highest level of environmental, social and governance (ESG) credit relevance for FBNH and FBN is a score of 3. ESG issues are credit-neutral or have only a minimal impact on the entity, either due to their nature or to the way in which they are being managed by the entity.