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-'. The Outlooks are Negative. A full list of rating actions is below.
The Negative Outlooks primarily reflect corporate governance weaknesses highlighted by the Central Bank of Nigeria (CBN) 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.
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. FBN's ratings are driven by its standalone creditworthiness. Currently, FBN represents around 90% of consolidated group assets.
FBNH's Long-Term IDR is driven by its intrinsic creditworthiness, as defined by its 'b-' Viability Rating. 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.
Operating conditions in Nigeria are gradually stabilising and Fitch forecasts 1.9% GDP growth in 2021, following a 1.8% 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.
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 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.
Loan quality remains a weakness compared with peers, although net loans were a low 32% of assets at end-1H21. FBNH's impaired loan ratio (Stage 3 under IFRS 9) further improved to 7.6% at end-1H21, from a peak of 25.8% at end-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% (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% 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).
FBNH's profitability metrics typically lag behind those of other large banks. Its operating profit/average total assets ratio was 1.2% (annualised) in 1H21, compared with the sector average of 2%, reflecting high loan impairment charges equal to 35% of 1H21 pre-impairment profit. Nevertheless, FBNH's earning capacity remains sound, underpinned by below-sector-average funding costs, highlighting the group's solid competitive position.
Capitalisation is a rating weakness. FBN's (bank-solo) total capital adequacy ratio of 15.7% at end-1H21 (excluding profit for the period), provided only a 70bp buffer above its minimum regulatory requirement. Capitalisation metrics remain vulnerable to asset quality risks, given fairly high unreserved impaired loans (equal to 15% of FCC) and the bank's sizeable stage 2 portfolio, on which provisions are very low.
Funding and liquidity are a relative rating strength. FBNH's liquidity profile in local currency is strong by domestic standards, with a Fitch-calculated loans/customer deposits ratio of 52% at end-1H21 (end-2020: 47%). Local currency liquidity is ample, with excess liquidity placed in government securities. In addition, the group has historically benefited 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.
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 and performance metrics and solvency levels.
ESG Relevance Factors
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.
FBNH's ESG Relevance Score for Governance Structure to '4' indicates that 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.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FBNH's ratings would be downgraded if the corporate governance shortcomings highlighted by the CBN persist and further weaknesses are uncovered, potentially leading to a significant impact on the banks' financial metrics.
Renewed deterioration in FBNH's asset-quality metrics, potentially indicated by a rise in the Stage 3 loans ratio to above 15% that drive large bottom-line losses or regulatory capital ratios falling below regulatory minimum could put further negative pressure on the rating, as could a further increase in capital encumbrance from unreserved impaired loans.
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.
FBNH and FBN have an ESG Relevance Score of '4' for Governance Structure reflecting the governance shortcomings recently highlighted by the CBN, which has a negative impact on the credit profile, and is relevant to the rating[s] 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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