Fitch Affirms FBNH, First Bank Ratings with Stable Outlook
Fitch Ratings has affirmed FBN Holdings Plc’s (FBNH) and First Bank of Nigeria Ltd.’s (FBN) Long-Term Issuer Default Ratings (IDRs) at ‘B-‘ with a stable outlook. The financial services group ratings affirmation came on its strong funding profile, healthy profit water down by rising stage loans and moderate capital buffer.
Fitch has also affirmed the issuers’ National Long-Term Ratings at ‘A (nga)’ and assigned Stable Outlooks. A full list of rating actions is below. The rating note stated that the group’s creditworthiness was however constrained by Nigeria’s Long-Term issuer default ratings due to the high sovereign exposure relative to their capital and the concentration of their operations in Nigeria.
FBNH, FBN ratings were balanced by their strong franchise, healthy profitability, moderate capital buffers and a stable funding profile against high credit concentrations. Fitch said FBN accounts for 10.4% of banking system assets at the end of the financial year 2022, adding that the bank’s strong franchise supports a stable funding profile and low funding costs.
The lender’s revenue diversification is considered significant, with non-interest income representing 36% of operating income in 2022. However, Fitch Ratings saw the bank’s single-borrower credit concentration material, with the 20-largest loans representing over 200% of total equity in 2022.
Oil and gas exposure was 31% of net loans in the financial year 2022, noted to be greater than the banking system average. Also, FBN’s sovereign exposure through securities and cash reserves at the Central Bank of Nigeria is considered to be high relative to FBNH’s Fitch Core Capital amidst growing stage loans.
However, the rating note indicated that FBNH’s impaired loans or Stage 3 loan ratio declined significantly to 4.7% in the financial year 2022 from a peak of 25% at the end of 2018 as a result of sizeable write-offs, reclassifications and, more recently, the flattering effect of strong loan growth.
Specific loan loss allowance coverage of impaired loans was 44% in 2022, Fitch Rating said in the report, adding that stage 2 loans remain high at 20% of gross loans; concentrated with oil and gas and largely US-dollar denominate.
According to the rating note, this represents a key risk to asset quality, having inflated following the naira devaluation. It noted however that FBNH delivers healthy profitability, as indicated by operating returns on risk-weighted assets (RWAs) averaging 2.9% over the past four years.
Analysts believe that the group earnings benefit from a low cost of funding and strong non-interest income but are constrained by a high cost-to-income ratio of 63% in 2022 and significant loan impairment charges amidst moderate capital.
The note reads that FBN’s standalone total capital adequacy ratio printed at 16.5% at the end of the first half of 2023 including unaudited interim profits. This suggests that the capital position has a moderate buffer over the bank’s minimum regulatory requirement of 15%.
Fitch Rating said the bank capitalisation may improve in the near term due to a proposed N150 billion rights issue. Fitch Affirms FBNH, First Bank Ratings with Stable Outlook Naira Gains as CBN Limits Tenure of Banks Chiefs.
