Moody's Investors Service, ("Moody's") has placed all long-term ratings and assessments of First Bank of Nigeria Limited (First Bank) on review for downgrade.
The review will focus primarily on an assessment of evolving governance considerations at First Bank, specifically corporate governance developments.
The rating action follows the dissolution of First Bank's board by the Central Bank of Nigeria (CBN), the bank's primary regulator, on the 29 April 2021. As a result of this action by the CBN, all the non-executive directors were removed while the executive management remained in place.
Removal of Non-Executive Board Members Highlights Governance Shortcomings
The review for possible downgrade reflects the rating agency's view that the removal of all non-executive directors of the bank's board by the regulator demonstrates corporate governance shortcomings and weaknesses in board oversight. The bank also needs to implement regulatory directives concerning the resolutions of loans to and shareholding in non-banking related parties, which reportedly had not be executed in the recent past.
Moody's notes that the outcomes of these developments are uncertain at this point, and the final and long-term governance, reputational and financial implications of the events for First Bank are also unclear.
While the bank's executive management team remained the same, the rating agency believes these developments could distract management's focus on implementing the bank's strategic plan and road to recovery. First Bank management's immediate key target was to reduce nonperforming loans (NPLs) to levels comparable with domestic peers. The rating agency recognises that, in the context of asset risks, the bank took steps to reduce its stock of problem loans, with its reported NPL ratio falling to 7.7% at year-end 2020 from 25.9% in 2018.
Moody's also notes the reputational risks associated with recent development as they could potentially influence investor confidence. In addition, the rating agency notes First Bank's relatively low proportion of provisions to its NPLs, at just about 40%, which puts its solvency at some risk in case higher loan-losses materialise than previously expected.
The Focus Of The Review
The review for downgrade will focus on First Bank's ability to address the shortcomings highlighted by the regulator as concerns its governance and risk procedures, among others, the management of its loan portfolio to related parties, and the rating agency will monitor any further corrective actions that the regulator may require. Moody's will also assess the likely impact of these changes on the bank's risk governance, its solvency level and its on-going efforts to reduce the bank's stock of NPLs.
Factors That Could Lead To An Upgrade Or Downgrade Of The Ratings
The bank's long-term deposit ratings could be downgraded if deficiencies in the governance structures of the bank persist and if there is any further sanctioning of the bank by the CBN, including but not limited to requirements to take corrective measures of any weaknesses that could be uncovered. Weaker financial performance than expected could also lead to a downgrade of the ratings.
There is limited likelihood that First Bank's ratings could be upgraded given the review for downgrade and the negative outlook on the government of Nigeria, its support provider in case of need. Stronger solvency improvements than what is currently captured in the ratings, together with a stabilisation of the sovereign outlook, could lead to stabilisation of the outlook.
List Of Affected Ratings
..Issuer: First Bank of Nigeria Limited
On Review for Downgrade:
....Adjusted Baseline Credit Assessment, Placed on Review for Downgrade, currently b3
....Baseline Credit Assessment, Placed on Review for Downgrade, currently b3
....Long-term Counterparty Risk Assessment, Placed on Review for Downgrade, currently B2(cr)
....Long-term Counterparty Risk Ratings, Placed on Review for Downgrade, currently B2
....NSR Short-term Counterparty Risk Ratings, Placed on Review for Downgrade, currently NG-1
....NSR Long-term Counterparty Risk Ratings, Placed on Review for Downgrade, currently A2.ng
....Long-term Issuer Ratings, Placed on Review for Downgrade, currently B2 , Outlook Changed To Ratings Under Review From Negative
....NSR Short-term Bank Deposit Ratings, Placed on Review for Downgrade, currently NG-1
....NSR Long-term Bank Deposit Ratings, Placed on Review for Downgrade, currently A2.ng
....Long-term Bank Deposit Ratings, Placed on Review for Downgrade, currently B2 , Outlook Changed To Ratings Under Review From Negative
....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 Ratings Under Review From Negative
The principal methodology used in these ratings was Banks Methodology published in March 2021 and available here.
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