First Bank of Nigeria Sees Rating Upgrades
GCR Ratings has affirmed First Bank of Nigeria Limited’s national scale long and short-term ratings of A-(NG) and A2 (NG) respectively, with the outlook revised to Stable from Negative Rating Watch.
The rating said the stable outlook reflects an expectation that asset quality metrics will continue to improve on the back of FirstBank’s recently institutionalised discipline credit culture and the gradual loan book diversification from the oil and gas sector to the real sectors.
“We also do not envisage material credit migration on the back of gradual macroeconomic recovery”.
“The improved earnings generation capacity and successful disposal of the available for sale assets are expected to support GCR core capital ratio around 15% over the rating horizon”, it added.
Commenting on national scale ratings on First Bank of Nigeria Limited, GCR said it reflects the strengths and weaknesses of FBN Holdings Plc, one of the largest financial services group in Nigeria.
FirstBank is regarded as the core entity within the Group, accounting for about 95% of the Group’s total assets at the end of the financial year 2020, the report noted.
GCR revision of the rating outlook from Negative Rating Watch to Stable is underpinned by the prompt containment of the board of director tensions and inherent operational risk which triggered regulatory interventions and consequently the reconstitution of both the bank and Group’s board by the Central Bank of Nigeria in April 2021.
The rating report indicates that the affirmed ratings reflect FirstBank’s well-established brand franchise, good geographic diversification, and robust funding and liquidity position.
However, it noted that these strengths are partly offset by the subdued capitalisation and elevated concentration risk across obligor, sector, and foreign currency exposures.
FirstBank is a top-tier bank in Nigeria and ranks among the leading banks in sub-Saharan Africa, with operations across seven African countries and three international financial markets.
At the financial year 2020, the bank controlled a sizeable market share of 14.1%, 13.8% and 12.1% of the Nigerian banking industry’s total assets, gross loans, and customer deposits respectively, GCR said.
Positively, the bank’s extensive branch networks, sustained investment in technology and the increasing number of firstmonies agents, have continued to strengthen its retail franchise and market position.
Being a member of the Group, FirstBank also benefits from cross-selling opportunities and business diversification. While revenue stability is good, the bank’s key profitability indicators continue to lag tier-one peers’ average.
It noted that the Group’s risk profile evidenced a notable improvement over the review period, underpinned by management’s remedial action and loan book clean-up exercise over the last five years.
In this regard, non-performing loans declined steadily to 7.2% as of the first half of 2021 as against 8.3% in 2020, 10.2% in 2019 and 25.4% in 2018, albeit remaining above the CBN’s tolerable limit of 5% and the industry average of about 6%.
Similarly, credit losses moderated to 2.0% as of the first half of 2021 from 2.4% in 2020, 2.6% in 2019, 4.0% in 2018 though counterbalanced by the elevated concentration risk.
While FirstBank’s top 20 obligors constituted a sizeable 48.5% of the loan portfolio as of the first half of 2021 compared with 53.7% in 2020, 34.5% of the loan book as at first half of 2020 tilted towards the oil and gas sector, although at a decreasing rate.
Also, foreign currency loans constituted a sizeable 47.5% of the loan portfolio as of the first half of 2021 from 47.9% in 2020 and measures above the estimated industry average of 35%.
According to management, foreign currency risk is partly mitigated through effective matching of related assets and liabilities and hedging through over-the-counter futures transactions and forwards.
The GCR computed core capital ratio registered at 14.1% in the financial year 2020, higher than 13.1% recorded in 2019 and assessed within the low range.
“We also considered the loan loss reserve coverage to be low, covering a moderate 38.8% of impaired loans at 2020 from 40.1% in 2019”.
Looking ahead, we anticipate the planned disposal of identified assets (as directed by the CBN) would support capitalisation metrics by about 200 basis points over the rating horizon.
As a result, GCR analysts expect the core capital ratio to hover around 15% over the next 12-18 months, saying that the sustained downward trend in credit losses and improved value propositions through leveraging digital platforms will further augment internal capital generation going forward.
However, it was noted that the Group’s funding and liquidity is robust and considered positively. The funding base is predominantly made up of customer deposits, which constituted a sizeable 76.7% at 1H 2021 compared with 77.5% in 2020.
The deposit pool registered on an average annual growth rate of 15.1% over the last five years, as the bank continues to leverage its digital platforms, extensive branch networks and strong retail franchise to mobilise the relatively cheaper retail deposits.
As a result, the low-cost current and savings account (CASA) deposits constituted a substantial 82.6% of the deposit mix at 1H 2021 from 80.8% 2020, underpinning the reported modest cost of funds of 1.8% as at 1H 2021 from 2.3% in 2020.
Furthermore, FirstBank’s deposit book remained well-diversified, with the 20 largest depositors accounting for 9.0% of customer deposits at 1H-2021 from 8.3% in 2020.
Liquidity is considered positive, with liquid assets covering 5.2x and 33.5% of wholesale funding and customer deposits respectively at 2020.
“We also view the liquidity management of the foreign currency book to be sound, with foreign currency liquid assets covering around 40% of total foreign currency liabilities as at 2020”, GCR said. #First Bank of Nigeria Sees Rating Upgrades
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