Culled—Proshare

26/6/2018/S & P Global Ratings

• We expect First Bank of Nigeria Ltd.’s asset quality to remain a rating weakness, over the next 12 months, despite the improved macroeconomic environment and as management continues to address legacy challenges.
•  We believe that FirstBank’s regulatory capital will remain comfortably above the minimum regulatory capital requirement, despite the negative impact from implementation of International Financial Reporting Standards (IFRS) 9.
• As a result, we are affirming our ‘B-/B’ global scale and ‘ngBB+/ngB’ national scale ratings on FirstBank.
• The stable outlook reflects our expectation that the bank will maintain a broadly stable financial profile over the next 12 months.

S&P Global Ratings today affirmed its ‘B-/B’ long- and short-term issuer credit ratings on Nigeria-based First Bank of Nigeria Ltd. and its non-operating holding company (NOHC), FBN Holdings PLC (FBNH). The outlook on both entities is stable. 

At the same time, we also affirmed our ‘ngBB+/ngB’ long- and short-term Nigeria national scale ratings on the FirstBank and FBNH. 

The rating actions reflect our view that FirstBank will continue to display weaker asset quality metrics and lower profitability than other rated top-tier banks in Nigeria in 2018, due to still-high credit costs. That said, we believe that the bank’s new leadership team will continue to progressively address the legacy asset-quality issues and institute more prudent risk-management measures. 

Although declining, the bank’s nonperforming loans (NPLs) remain high at 22.8% at year-end 2017 (following the write-off of 8.3% of total loans). The oil and gas sector remained the largest contributor to NPLs, accounting for 54.6% of total NPLs, followed by the telecommunication sector at 14.2%. Our assessment of FirstBank’s credit profile also reflects the bank’s high concentration by sector and significant exposure to foreign currency loans (50% of total loans in 2017). The bank’s cost of risk remained elevated at 6.4% at year-end 2017. 

In our opinion, cost of risk will remain high and above the sector average, while NPLs will drop below 20% over the next 12-18 months due to some recoveries in the upstream oil and gas sector. Additionally, we expect that loan loss coverage by provisions will improve in the next 12-18 months. 

We anticipate that our risk-adjusted capital ratio for the bank will remain below 5% in the next 12-18 months, compared with 4.9% at year-end 2017. The decline will mainly be attributable to the IFRS 9 implementation, which resulted in a deduction of Nigerian naira (NGN)36.1 billion ($106 million) from retained earnings at March 31, 2018, and high credit losses. Nonetheless, we expect the bank to maintain its capital requirement (CAR) above the regulatory minimum of 15%, due to sufficient earnings retention and measured asset growth. Moreover, the bank’s U.S. dollar-denominated subordinated debt would partly protect its capital position in case of naira depreciation. 

Our assessment of FirstBank’s credit profile also reflects its good competitive position in Nigeria underpinned by its large retail footprint, low cost of funding, and stable deposit base. On Dec. 31, 2017, FirstBank recorded a stable funding ratio of 145%, supported by a high proportion (74.3%) of deposit funding. Broad liquid assets covered 54.8% of short-term deposits and 3.2x short-term wholesale funding at the same date, which compares well with the level of peers. However, similar to other banks operating in Nigeria, FirstBank’s deposit base is somewhat confidence sensitive, due to its contractually short-term nature. 

The ratings on the bank reflect the overall creditworthiness of the FirstBank group, whose group credit profile (GCP) we assess at ‘b-‘. The bank is the core component of the group. We do not incorporate any external support in the bank’s rating, despite our view of its high systemic importance. That is because we view the likelihood of support from the Nigerian government to systemically important banks as uncertain. 

Our ratings on FirstBank’s holding company, FBNH, are at the same level as the ratings on FirstBank, reflecting the absence of debt at the holding company level. Under our criteria, we generally notch down from the GCP to reflect the structural subordination of the NOHC and its exposure to potential regulatory intervention. 

Nevertheless, in FBNH’s case, we take into account the absence of debt at the holding company level and believe that the risk of the NOHC defaulting is not commensurate with the ‘CCC’ rating category. 

The stable outlook on FirstBank reflects our view that the bank will maintain its CAR above the minimum requirement of 15% over the next 12 months, despite IFRS 9 implementation. It also reflects our view that asset quality will continue to stabilize, although still at weak levels, while the bank will maintain its above-average funding and adequate liquidity over the next 12 months. 

We could lower the ratings on FirstBank if we see a further deterioration in the bank’s asset-quality indicators, or a significant decline in capitalization because of higher credit losses. 

A positive rating action appears remote and would require a substantial improvement in asset-quality indicators while maintaining capitalization and customer franchise at current levels.