By Modupe Gbadeyanka
Lagos Nigeria, 11 September 2017 — Global Credit Ratings has affirmed the national scale ratings assigned to First Bank of Nigeria Limited of A-(NG) and A1-(NG) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until August 2018.
RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to First Bank of Nigeria Limited1 (“FirstBank” or “the Bank”) based on the following key criteria:
The ratings of FirstBank are supported by its established franchise and systemically important status, with likelihood of strong support from the Federal Government of Nigeria in the event that such support is required. Offsetting these key rating drivers is the Bank’s moderated profitability in recent years, primarily due to the level of loan impairment charges.
Asset quality remains a key rating concern, with the Bank’s gross non-performing loan (“NPL”) ratio escalating to 24.2% at FY16 (FY15: 17.8%). This was largely driven by rising delinquent loans, particularly within the troubled oil and gas sector, where the Bank remains highly exposed. While management efforts towards revamping the risk management framework and architecture are noted, additional impairment pressure is expected, as the exposure within the oil and gas sector remains substantial (constituting 38.6% of gross loans at 1H FY17), with the likelihood of offsetting the full impact of recovery efforts at FY17. Based on the unaudited results for 1H FY17, gross NPLs stood at 21.8% of total gross loans.
The Bank remains adequately capitalised reporting a risk weighted capital adequacy ratio of 17.8% at FY16 FY15: 17.1%), above the prudential threshold of 15%. The position is not expected to change imminently, given management’s muted loan growth prospects, with focus on organic growth through earnings accretion.
FirstBank has a robust funding structure, supported by its strong franchise, and diversified deposit book, though largely short-dated on contractual basis. Liquidity risk is considered low, with regulatory liquidity ratio of 52.7% at FY16 (for FirstBank Nigeria only), well above the prudential minimum of 30%.
The Bank’s exposure to foreign currency risk remains a concern. At FY16, about 51% of gross loans were denominated in foreign currency, the bulk of which remains within the troubled oil and gas sector. Additionally, exposure exists within borrowings and deposits. While FirstBank is taking necessary mitigating measures (including portfolio realignment), the volatility in the foreign exchange market remains a significant risk.
Although FirstBank’s net-interest income of N294.3bn stood above its peers, its bottom-line earnings were considerably weakened, due to high loan impairment charges. Thus, pre-tax profit remained low around N10.7bn (FY15: N9.7bn) in FY16, far below the peer average. According to management, the Bank will continue to enhance its risk management processes and operational efficiency in order to improve operating performance in the coming years.
While the challenging operating environment has heightened uncertainties across all forward looking scenarios, positive rating momentum is dependent on a rebound to strong asset quality and profitability, with markedly improved competitive positioning. Conversely, sustained negative trends in asset quality and profitability, coupled with a significant deterioration in the Bank’s liquidity and capital ratios could result in negative rating action.
1 First Bank of Nigeria Limited is the commercial banking group of FBN Holdings Plc. All figures are for the commercial banking group except where stated otherwise.
Dipo Olowookere 
Aduragbemi Omiyale