Fitch Ratings has upgraded the long-term Issuer Default Ratings (IDRs) of FBN Holdings Plc (FBNH) and First Bank of Nigeria Ltd (FBN) to ‘B’ from ‘B-‘, with stable outlook.
Fitch also upgraded their Viability Ratings (VR) to ‘b’ from ‘b-‘, according to a statement.
It said the upgrade of the long-term IDRs followed that of the VRs, reflecting that corporate governance irregularities publicly raised by the Central Bank of Nigeria (CBN) in April 2021, including two longstanding related-party exposures, have largely been addressed, and therefore risks to capitalisation have receded, helped by strong internal capital generation since the irregularities were raised.
The statement said: “Fitch has withdrawn FBNH’s and FBN’s Support Ratings and Support Rating Floors as they are no longer relevant to the agency’s coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned Government Support Ratings (GSR) of ‘no support’ (ns) to both Issuers.
“FBNH is a non-operating bank holding company. Its VR is equalised with the group VR, derived from the consolidated risk assessment of the group, due to the absence of double leverage and high fungibility of capital and liquidity. As the main operating entity, FBN’s VR is also equalised with the group VR.”
According to management, the two related-party exposures highlighted by the CBN, which included equity and credit exposures to two companies of whom FBNH’s previous chairman was also chairman, have largely been disposed of and repaid.
Fitch understands from management that FBNH and FBN have not been subject to penalties in relation to irregularities raised by the CBN in April 2021 and no further irregularities have been raised.
It said: “FBN is the third-largest bank in Nigeria, representing 11 percent of domestic banking-system assets at end of 2021. A strong franchise supports a stable funding profile and a low cost of funding. Revenue diversification is strong, with noninterest income representing 48 percent of operating income in 2021.
“Single-borrower credit concentration is material, with the 20-largest loans representing 157 percent of Fitch Core Capital at end-1H22. Oil and gas exposure (30 percent of net loans at end-2021) is higher than the banking-system average and weighted towards higher-risk upstream and services sub-segments.”
It said FBN’s impaired loans (stage 3 loans under IFRS 9) ratio has declined significantly to 5.6 percent at end-1H22 from a peak of 25 percent at end-2018 as a result of sizeable write-offs, successful restructurings and recoveries and, more recently, the flattering effect of strong loan growth.
Stage 2 loans remain significant (15 percent of gross loans at end-1H22) but Fitch expects these to decline as oil and gas exposures return to performing status, according to the statement.
It said: “Specific loan loss allowance coverage of impaired loans (49 percent at end1H22) is acceptable in view of its collateral levels. FBNH delivers healthy profitability, as indicated by an operating return on risk-weighted assets averaging 2.6 percent over the past four years (4 percent in 2021, underpinned by large recoveries on a previously written-off loan).
“Earnings benefit from a low cost of funding and strong non-interest income but are constrained by a high cost-to-income ratio (74 percent in 2021) and significant loan impairment charges in recent years.”