GCR Lower Outlook on First Bank of Nigeria to Stable from Positive
GCR Ratings has affirmed First Bank of Nigeria Limited’s national scale long and short-term issuer ratings of A+ (NG) and A1 (NG) respectively, with the outlook revised to stable from positive.
According to the rating note, First Bank of Nigeria ratings reflect the underlying credit profile of the broader FBN Holdings Plc as GCR views the banking arm as the core operating entity within the group, accounting for over 90% of the group’s assets and earnings.
“While the ratings have been assigned exclusively to the bank, the below analytical discussion relates primarily to the group”.
In its explanation, GCR stated that the ratings were affirmed on account of FBNH’s sustained strong competitive position within Nigeria’s financial services sector, as well as a robust funding and liquidity profile.
However, analysts noted that over the last 12 months, the bank’s core capital position was pressured by a severe weakening of the Naira against the US Dollar.
Consequently, GCR analysts said they have revised the outlook from positive to stable after considering the potential impact of fresh equity injection and internal capital generation over the rating horizon.
Analysts said competitive position is a strong ratings driver for the financial services company, based on the group’s market share, geographical diversification as well as sustained improvement in financial performance relative to peers.
“Being the fourth largest financial services group in Nigeria by earnings, deposits and asset size, FBNH plays a critical role in the Nigerian economy, such that the bank is considered a ‘domestic systematically important bank’ by the regulator”, GCR said.
Analysts also noted that the group operates under a strong local brand, developed through over a century of providing financial services in Nigeria and more recently in six other countries across Africa and the United Kingdom, as well as representative offices in France and China.
FBNH also maintains a good relationship with global international financial institutions, which positions the group as a leader in trade finance in Nigeria. Its capitalization is also considered a key rating constraint, due to sustained increases in the risk weighted assets following successive devaluations of the naira.
The bank’s GCR core capital ratio has been declining since 2022 and reached about 13.0% as at March 2024 from 14.2% as at December 2023, according to the rating note. GCR stated that the group management expects to raise an additional N270 billion, or USD 164.8 million, in equity for the bank – to meet new minimum capital regulatory standards.
“We expect the core capital ratio to remain within the 12.5% to 15.0% band over the next 12 months depending on how much fresh equity is injected and considering projected internal earnings accretion over the period,” GCR said. The ratings analysts said FBNH’s risk position has not materially deteriorated despite significant local currency repricing, high interest rates, and generally weaker macroeconomic indices.
In terms of credit risk, ratings analyst said they have continued to see lower cost of risk and decreased non-performing loan (NPL) ratios as a result of pragmatic efforts to achieve and maintain better asset quality.
GCR, however, said the group’s risk position is slightly negative to the ratings because of relatively high obligor and foreign currency (USD) concentrations in the loan book.
The group’s operational risk management framework has been fairly effective at combating cybersecurity threats. The ratings note said nevertheless, the bank was a victim of internal fraud by which about N40 billion or USD24.4 million was lost over a period of time.
The rating note revealed that the management has since taken concrete steps to remedy the situation by aggressively pursuing recoveries and implementing stricter internal controls to prevent future occurrences.
The group’s funding structure is diversified, stable and relatively cheap, according to GCR, saying that customer deposits typically make up over 75% of total funding, with an overall stable funds ratio that has averaged more than 90% in the last five years.
Although funding is predominantly low cost, the average cost of funds has increased to 5.9% as of March 2024 from 2.3% in December 2023 due to monetary policy tightening.
“Liquidity is also strong, supported by behaviourally sticky deposits and good access to international financial institutions.”, said the ratings analysts. FBNH is noted to maintain sufficient liquid assets to meet local and foreign currency obligations. Liquid assets typically cover over 30% of deposits and over 200% of wholesale funding. Thus, the funding and liquidity profile is a strong driver of the ratings.
Outlook statement
The outlook is stable. The addition of new equity capital could strengthen the bank and the group’s capital position, but Ratings analysts said they do not expect the GCR capital adequacy ratio to exceed 15% over the next twelve months.
“We expect asset quality considerations, especially cost of risk and NPL ratio, to remain under 5.0% in line with peers in Nigeria, while concentrations (by obligor and currency) in the loan book will slightly reduce over the outlook period,” GCR ratings analysts stated. #GCR Lower Outlook on First Bank of Nigeria to Stable from Positive Rising Costs Drag Nigeria Private Sector Activity Down in Sept – PMI
