Moody's Investors Service ("Moody's") has confirmed the B2 long-term bank deposit ratings and the b3 Baseline Credit Assessment (BCA) of First Bank of Nigeria Limited (First Bank). The rating action concludes the review for downgrade initiated on 5 May 2021. The outlook on long-term deposit ratings is negative.
The confirmation reflects Moody's views that: (1) governance issues raised by the regulator in April are being addressed; (2) the bank's standalone credit profile will remain resilient; and (3) government support will remain high.
The primary drive of the confirmation is Moody's view that the new board appointed by the Central Bank of Nigeria (CBN) -- following the removal of all non-executive directors of the bank's board by the regulator in April -- will reinforce the existing strategy of the unchanged executive management team. This means that there has been little disruption to the bank's strategic direction and the new board will enhance oversight on management strategy execution while improving First Bank's relationships with various stakeholders, including the regulators. In addition, First Bank is addressing its identified related-party loans, which we estimate are lower than 5% of total loans, and non-permissible exposures, per CBN's directive.
At the same time, the confirmation of the BCA also acknowledges the improvements of the bank's asset quality over the past three years, with the reported ratio of nonperforming loans reducing to 7.2% of gross loans as of June 2021 from 26.0% at year-end 2018. The bank continues to work out its legacy nonperforming loans while the formation of new problem loans from loans originated between 2020 and 2016 has been muted (at lower than 1% according to the company), mainly due to controlled loan growth. First Bank's foreign currency liquidity has also improved. The bank's proportion of liquid foreign-currency asset to total foreign-currency assets was robust at 48% as of December 2020.
Moody's continues to assign a 'high' probability of support from the Government of Nigeria (B2 negative) to First Bank, resulting in a one-notch uplift of the b3 BCA to B2 deposit ratings. The assumption of 'high' probability of support indicates Moody's view that authorities will likely take actions that benefit the bank's depositors if needed. First Bank's systemic importance in the system, with a total deposit market share of about 14% at year-end 2020 and more than 34 million customer accounts in June 2021, coupled with the authorities' track record of monitoring First Bank's financial health, indicate that CBN will likely intervene early and protect depositors in the future.
Rationale for Negative Outlook
The negative outlook reflects the negative outlook on the support provider, the Government of Nigeria as First Bank's deposit ratings benefit from a one notch of support uplift from the b3 BCA. The negative outlook also acknowledges the fragile operating environment due to the pandemic that will likely restrain the pace of improvement of the bank's asset quality and profitability, and the bank's relatively weaker solvency metrics.
Factors That Could Lead to an Upgrade Or Downgrade of the Ratings
A deterioration in the bank's solvency and funding profiles, in particular a regulatory capital ratio closer to the 15.0% minimum requirement, would put downward pressure on the ratings. A downgrade of Nigeria's sovereign rating or a decline in the government's willingness to provide support would also exert negative pressure on the ratings.
There is limited scope for an upgrade given the negative outlook. However, a sustained improvement in the bank's solvency metrics and core profitability will put upward pressure on the bank's BCA. The bank's outlook could change back to stable if the sovereign rating outlook is stabilized and the bank maintains good financial performance.
List of Affected Ratings
..Issuer: First Bank of Nigeria Limited
....Adjusted Baseline Credit Assessment, Confirmed at b3
....Baseline Credit Assessment, Confirmed at b3
....Long-term Counterparty Risk Assessment, Confirmed at B2(cr)
....Long-term Counterparty Risk Ratings, Confirmed at B2
....NSR Short-term Counterparty Risk Ratings, Confirmed at NG-1
....NSR Long-term Counterparty Risk Ratings, Confirmed at A2.ng
....Long-term Issuer Ratings, Confirmed at B2, Outlook Changed To Negative From Ratings Under Review
....NSR Short-term Bank Deposit Ratings, Confirmed at NG-1
....Long-term Bank Deposit Ratings, Confirmed at B2, Outlook Changed To Negative From Ratings Under Review
....NSR Long-term Bank Deposit Ratings, Confirmed at A2.ng
....Short-term Counterparty Risk Assessment, Affirmed NP(cr)
....Short-term Counterparty Risk Ratings, Affirmed NP
....Short-term Issuer Ratings, Affirmed NP
....Short-term Bank Deposit Ratings, Affirmed NP
....Outlook, Changed To Negative From Ratings Under Review
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