Moody’s Rates First Bank’s NPL Ratio Credit Negative

By Modupe Gbadeyanka

The non-performing loan (NPL) ratio of First Bank of Nigeria (FBN) Limited has been rated credit negative by Moody’s Investors Service because it requires higher loan-loss provisions that will harm profitability.

Moody’s said in a report on Thursday that, “We expected the bank’s NPL ratio to decline to 15 percent to 17 percent by year-end 2018 and to less than 15 percent this year.

“Although management is confident that a large percentage of these NPLs will be resolved this year, Nigeria’s benign economic environment will likely delay defaulters’ recoveries.”

First Bank, one of the five tier-one lenders in Nigeria, announced in its Q1 2019 earnings through its parent company, FBN Holdings Plc, that its NPL ratio was 25.3 percent of gross loans as of March 2019, and 25.9 percent at year-end 2018, versus 19.8 percent in October 2018.

FBN’s Stage 3 (impaired) loans at year-end were N535 billion (about $1.5 billion), which raised the NPL ratio to its present level, highest among its peers.

According to Moody’s, First Bank’s NPL ratio has been high, averaging around 22.6 percent between 2015 and 2018, indicating a challenging environment.

In addition, the Stage 2 loan, those with a significant deterioration in credit risk were 26 percent of gross loans at year end 2018 because of greater delinquencies.

Assuming there is no loan growth in 2019, and using FBN’s NPL ratio, which is a good proxy for First Bank, the bank would need to cut its stock of Stage 3 loans by about 60 percent to reduce the NPL ratio to below 10 percent, which is its management’s target for 2019. It is worthy to note that slower reduction in NPLs will strain First Bank’s solvency and credit profile.

Moody’s noted that because NPLs are concentrated among a few borrowers, resolution of just a few defaulters would significantly reduce the NPL ratio.

First Bank had substantial provisions of about 82 percent of NPLs as of March 2019, which would allow it to accelerate writing off some of its NPLs.

High NPLs will require First Bank to continue to set aside large loan-loss provisions, which will erode its net profits and reduce the amount it can retain capital.

First Bank’s high loan-loss provisions, which averaged 5.7 percent between 2014 and 2017, are significantly higher than those of its peers, which averaged 1.3 percent over the same period. Management’s 2019 loan-loss provision ratio target is 3 percent to 4 percent.

First Bank’s pre-provision income generation capacity is robust, which enables the bank to absorb these elevated asset risks.

The bank’s ratio of pre-provision income to average assets compares favourably with peers whose average ratio was 3.9 percent between 2014 and 2018.

However, the bank’s ratio of net income to average assets is weaker than its peers, limiting organic capital generation.