Fitch 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-' with a Negative Outlook. The affirmation reflects our view that the impact of the Central Bank of Nigeria's (CBN) replacement of FBNH and FBN's boards, the identification of corporate governance failings and the imposition of corrective measures are tolerable at the rating level.
On 29 April 2021, the CBN removed the non-executive directors on the boards of FBNH and FBN -a domestic systemically important bank- and replaced them with its own appointees. The CBN says its actions were in the interest of financial stability and minority shareholders. It says it acted because FBN had made significant executive management changes, including replacing the CEO, without prior notice or approval of the regulator. The CBN also highlighted corporate governance failings pertaining to long-standing and problematic related-party exposures, and failure to comply with regulatory directives.
We have assessed the near-term financial impact of these actions on FBNH and FBN and believe this is tolerable at the rating level, even though the final outcome is uncertain. In our view, any remedial actions imposed by the CBN, including a potential reclassification of related-party exposures as impaired, will not have a material effect on the group's asset quality, profitability and capitalisation.
However, this does not consider any possible additional actions by the CBN, especially if FBN fails to implement the regulator's corrective measures or if there were any further uncovering of corporate governance irregularities.
The Outlook remains Negative, reflecting FBNH's pre-existing asset quality and capitalisation weaknesses as well as the group's corporate governance weaknesses highlighted by the CBN. These could put pressure on the ratings.
Key Rating Drivers
FBNH is the non-operating holding company that owns FBN. FBNH's ratings are aligned with those of FBN (which represents around 90% of consolidated group assets) due to high capital and liquidity fungibility within the group, and low double leverage (at 95% at end-1H20) at the holding company level.
FBNH's IDR is driven by its intrinsic creditworthiness, as defined by its 'b-' Viability Rating (VR). The rating 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, where headroom above the minimum regulatory capital requirements is also moderate. Capitalisation is a factor of high importance to the VR.
The new boards appointed to FBNH and FBN comprise individuals with sufficient experience and expertise. However, we view such major change as hugely disruptive. There are no changes in FBNH and FBN's executive management team.
We believe the governance shortcomings cited by the CBN reflect poorly on FBNH's reputation and on the group's governance and control practices. As a result, we have revised down our assessment of FBNH's Management and Strategy score to 'b-' from 'b'.
We also assigned a negative outlook to this factor, which reflects the uncertainty surrounding additional remedial actions that the CBN may impose due to these related party exposures as well as the potential for further uncovering of governance irregularities. It also captures the lack of track record of the new board and its ability to restore confidence in FBNH and FBN.
Asset quality remains a rating weakness. FBNH reported an improved impaired loan ratio of 7.9% at end-1Q21 (end-2020: 7.7%). However, FBNH's reported reserve coverage of 54.5% at end-1Q21 (end-2020: 48%) remains significantly weaker than domestic peers'. Our assessment indicates that if the related-party loan highlighted by the CBN were classified as impaired, the ratio would be unlikely to be above 10% (excluding any new impaired loan generation from ordinary business).
Capitalisation remains a rating weakness and has a high influence on the ratings. FBN reported a capital adequacy ratio of 16.6% at end-1Q21 (excluding interim profits), which provides limited headroom above its 15% minimum regulatory requirement. In addition, FBNH's capitalisation metrics remain vulnerable to asset-quality risks given significant capital encumbrance by unreserved impaired loans.
FBNH's profitability metrics typically lag behind those of the other large banks, mainly due to high loan impairment charges. In our view, the corrective measures, including higher provisioning on related-party loans or the sale of 'non-permissible' equity investments, would not materially affect profitability in the near term.
Our conversations with FBNH give us to understand there has been no adverse effect from recent events on its funding and liquidity profile, which remains healthy. FBNH's funding profile continues to benefit from a substantial customer deposit base, which provides around 75% of its non-equity funding.
FBN's senior debt issued by FBN Finance Company BV is rated in line with the bank's Long-Term IDR, as the notes ultimately represent unconditional, senior unsecured obligations of the bank, which rank pari passu with its other senior unsecured obligations.
Unless otherwise stated above, the key drivers of FBNH's other ratings and the ratings of its subsidiaries are in line with our most recent Rating Action Commentary (See "Fitch Affirms FBN Holdings Plc at 'B-'; off RWN; Outlook Negative" published on 5 October 2020).
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings of FBNH would be downgraded if the corporate governance shortcomings highlighted by the CBN persist and if any further weaknesses are uncovered, potentially leading to a greater financial impact.
Reputational repercussions that would make it harder for FBNH to meet its pre-tax profit growth ambitions, or significant adjustments to the group's management and strategy, could also contribute to rating pressure.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside to the ratings is unlikely at present.
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.
FBN Holdings Plc: Governance Structure: 4
First Bank of Nigeria Ltd: Governance Structure: 4
We believe the recent governance shortcomings could damage FBNH's reputation and reduce investor confidence, and additional remedial actions from the CBN could damage FBNH financially, especially if regulatory investigations highlight the need for certain loans to be classified as impaired or if loan loss provisioning needs to be strengthened. This could have a negative impact on capital adequacy.
We have therefore raised FBNH's ESG Relevance Score for Governance Structure to '4' from '3', as the group's governance issues are a contributor to the Negative Outlook. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
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