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Moody’s Affirms First Bank’s Deposit Ratings, Predicts Drop in NPL Ratio

By Dipo Olowookere

The B2/Not Prime long-term and short-term local currency deposit ratings of First Bank of Nigeria Limited have been affirmed by Moody’s Investors Service.

In a statement issued on Tuesday and obtained by Business Post, the rating agency said it also affirmed the lender’s B3/Not Prime long-term and short-term foreign currency deposit ratings.

At the same time, Moody’s has affirmed the bank’s B2/Not Prime long-term and short-term, local currency and foreign currency Counterparty Risk Ratings (CRR) and its baseline credit assessment (BCA) and adjusted BCA at b3, while changing the outlook on long-term ratings to stable from negative.

Moody’s explained that the affirmation of First Bank’s ratings was driven by the bank’s moderate capital, resilient pre-provision profitability and a stable funding profile. These strengths are counterbalanced by lender’s still high stock of nonperforming loans (NPLs) compared to other large Nigerian banks, reflecting relatively modest progress in reducing its NPLs.

It also noted that the decision to change the outlook to stable from negative reflects Moody’s view that, while NPLs remain elevated, downside risks to asset quality have considerably diminished following remedial steps taken by the bank and should slowly decline going forward.

In particular, Moody’s noted emphasised that First Bank reduced its foreign currency denominated loans and efforts are underway to reduce single-name concentrations, adding that the improving operating environment, especially in relation to oil prices and the bank’s significant exposure to the upstream oil and gas sector, will also help prevent formation of large stocks of new NPLs.

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Moody’s said it expects that the bank’s NPL ratio to reduce further, most plausibly at a slow pace over several quarters, as the bank hopes to resolve its current large problematic loans gradually because of the long time it tends to take to foreclose on collateral in Nigeria.

Moody’s said First Bank benefits from its modest capital, with a ratio of tangible common equity to risk weighted assets at 12.2 percent as of December 2017.

The bank’s pre-provision profitability remains resilient at 4.2 percent at year-end 2017, with Moody’s expecting the lender to maintain its solid pre-provision profitability, supported by its high net interest margins and non-interest income that is benefiting from the bank’s growing alternative channels strategy.

In addition, the rating agency assesses the bank’s funding profile as stable, supported by its large stock of liquid assets and moderate reliance on market funding.

However, First Bank’s strengths are moderated by its high NPLs compared to its Nigerian peers (Nigerian large banks). Despite improvements in its NPLs, the gap between the bank’s NPLs at 20.5 percent as of June 2018 and that of its local peers, at an average of 5.6 percent, remains wide.

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“The high NPLs reflect the bank’s relatively still large sectoral and single-name concentration risks and its legacy exposure to the oil and gas industry which created high NPLs during the oil price downturn in 2016.

“Also, the bank’s foreign currency loan book remains high at 48 percent of its total loans as of June 2018,” the statement said.

It added that First Bank continues to make progress in improving its asset quality as the NPL ratio reduced to 20.5 percent as of June 2018, from a peak of 24.2 percent at year-end 2016.

Moody’s says it expects the NPL ratio to gradually fall to 12-15 percent range within the next 12-18 months, driven largely by the on-going balance sheet de-risking and a more favourable operating environment, which will help prevent the formation of new impaired loans.

The bank reduced its foreign currency loan book by 36 percent between 2015 and 2017, adjusted for naira devaluation. The better operating environment, including the current high oil prices, will support performance of First Bank’s large exposure to the upstream oil and gas sector because a majority of these exposures have been restructured on assumption of lower oil price.

The rating agency also expects the lender to benefit from its enhanced risk management governance that resulted in tighter controls and better underwriting standards.

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“Moody’s expects better risk management processes will improve the quality of FBN’s new loans and reduce concentration risks.

“First Bank’s loan book, which contracted 7 percent between June 2018 and year-end 2017, will also help contain new NPL formation.

“However, Moody’s expects a moderate recovery in loan growth in the next 12-18 months. The bank increased its ratio of provisions to NPLs to 82 percent, which is now in line with global peers,” it said.

The rating agency noted the bank’s improvements in its foreign currency liquidity. By cutting back foreign-currency lending and paying off some its borrowings, saying First Bank will improve the coverage of its foreign currency borrowings by liquid foreign currency assets (cash and bank balances, loans due from banks and securities for trading) to about 2.5x from 1.9x at year-end 2017.

Moody’s stressed that the bank’s ratings could be upgraded if its asset risk metrics continue to improve toward the median of other large Nigerian banks, adding that the ratings could also be upgraded if Nigeria’s sovereign rating is upgraded.

However, it warned that the ratings could be downgraded if there is a deterioration of the bank’s asset quality metrics that would place negative pressure on its earnings and capital buffers.

“A downgrade of Nigeria’s sovereign rating would also exert pressure on the bank’s ratings,” the statement said.

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Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan.

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