Fitch Upgrades FBN Holdings, First Bank to ‘B’, Stable Outlook

Fitch Ratings has upgraded FBN Holdings Plc’s (FBNH) and First Bank of Nigeria Limited’s (FBN) long-term issuer default ratings (IDRs) to ‘B’ from ‘B-‘.
The global rating agency in a statement at the weekend also assigned stable outlooks on the holding company and its subsidiary, just as it upgraded their viability ratings (VR) to ‘b’ from ‘b-‘.

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 risks to capitalisation have receded, helped by strong internal capital generation since the irregularities were raised.

“Fitch has withdrawn FBNH’s and FBN’s Support Ratings and Support Rating Floors as they are no longer relevant to the agency’s coverage following the publication of its updated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 November 12, 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,” it added.

Commenting on the governance irregularities that had been addressed in the institutions, it stated: “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.

“FBN is the third-largest bank in Nigeria, representing 11 per cent of domestic banking-system assets at end-2021. A strong franchise supports a stable funding profile and a low cost of funding.

“Revenue diversification is strong, with non-interest income representing 48 per cent of operating income in 2021,” it added.
In term of material credit concentrations, it noted that single-borrower credit concentration was material, with
the 20-largest loans representing 157 per cent of Fitch Core Capital (FCC) at the end of the first half of 2022.
“Oil and gas exposure (30% of net loans at end-2021) is higher than the banking-system average and weighted towards higher-risk upstream and services sub-segments.

“Improved Asset Quality: FBN’s impaired loans (Stage 3 loans under IFRS 9) ratio has declined significantly to 5.6 per cent at the end of the first half of 2022 from a peak of 25 per cent at end-2018 as a result of sizeable write-offs, successful restructurings and recoveries and, more recently, the flattering effect of strong loan growth.”

Furthermore, it stated that FBNH delivers healthy profitability, as indicated by an operating return on risk-weighted assets (RWAs) averaging 2.6 per cent over the past four years (4% 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 were constrained by a high cost-to-income ratio (74% in 2021) and significant loan impairment charges (LICs) in recent years.