S&P Affirms First Bank ‘B-/B’ Ratings, Revises Outlook to Stable

By Dipo Olowookere

One of the leading rating agencies in the world, S&P Global Ratings, has revised its outlook on First Bank of Nigeria to stable from negative.

In a statement issued on Wednesday, S&P also revealed that it has affirmed its ‘B-/B’ long- and short-term counterparty credit ratings on top Nigerian lender.

In addition, the rating firm said “we have raised our long-term national scale rating on First Bank to ‘ngBB+’ from ‘ngBB’, while we have affirmed our short-term national scale rating at ‘ngB’.”

“Furthermore, we took the same rating actions on FirstBank’s non-operating holding company (NOHC), FBN Holdings PLC (FBNH),” S&P said.

Explaining the reason for its action, the agency said the rating actions reflect its view that First Bank’s regulatory capital has improved and the risk of breaching regulatory requirements has thus diminished.

In addition, the bank’s funding and liquidity remain a credit strength. Although asset quality remains a weakness, it believes this was stabilizing mainly due to the steadying of the oil price and new management’s efforts.

“We expect First Bank will continue to display weaker asset quality metrics and lower profitability than other rated top-tier banks in Nigeria in 2017 due to continuing high credit costs. That said, we believe that the bank’s new leadership team will address the legacy asset quality issues and institute more prudent risk management measures,” the rating company stated.

According to S&P, cost of risk jumped to 10.4% at year-end 2016 from 5.7% at year-end 2015, and nonperforming loans (NPLs) increased to 24.4% for the same period compared with 18.1% the prior year.

The performance of the bank’s portfolio stems from high concentration and foreign currency loans (51% of total loans in 2016), particularly the oil and gas-related exposures.

This performance and the huge impairments have prompted the bank to recruit a new Chief Risk Officer and launch a review of its risk management process to improve loans approvals, risk monitoring, and collection.

The bank is also in the process of de-risking its loan portfolio by converting some of its vulnerable foreign currency exposures to local currency.

“In our opinion, cost of risk will remain high and above the sector average, but decline to 5.3% over the next 12-18 months, while we think NPLs will drop below 20%. At year-end 2016, the bank restructured 5% of its portfolio, with the oil and gas sector accounting for 70% of the total.

“We expect First Bank to continue to restructure some loans, particularly in the downstream oil, manufacturing, and general commerce sectors in 2017.

“We anticipate that our risk-adjusted capital (RAC) ratio for the bank will decline slightly below 5% in the next 12-18 months. This will result from the bank’s risk asset growth moderately outpacing internal capital generation, based on our assumption of a 20% devaluation of the Nigerian naira (NGN) in 2017 and high credit costs,” the statement said.

On Dec. 31, 2016, FirstBank’s CAR improved to 17.8% from 15.4% on June 30, 2016, following a write back of a capital charge of NGN29 billion ($95 million) for exceeding the related party single obligor limit and an increase in retained earnings.

First Bank raised U.S. dollar funding in 2013 and 2014, which underpins its long dollar position at year-end 2016. The bank’s U.S. dollar-denominated subordinated debt provides a natural hedge to its capital position in the scenario of naira depreciation.

Positively, S&P said it views the bank as well-positioned in Nigeria’s competitive banking sector, thanks to its large retail footprint, low cost of funding, and stable deposit base. On Dec. 31, 2016, First Bank recorded a stable funding ratio of 125%, supported by a high proportion (66%) of deposit funding.

The bank’s foreign currency maturity profile displayed positive gaps at year-end 2016. Net broad liquid assets covered 54% of short-term deposits, comparing well with peers.

However, similar to other banks operating in Nigeria, First Bank’s deposit base is somewhat confidence sensitive, due to its contractually short-term nature.

The ratings on the bank reflect the overall creditworthiness of the First Bank group, whose group credit profile (GCP) it assess at ‘b-‘. The bank is the core component of the group, which is one of the largest in the Nigerian financial services industry, with a significant retail franchise, providing it with a leading deposit franchise and good naira liquidity.

S&P said despite the bank’s high systemic importance, the ratings on First Bank reflect its assessment of the bank’s core group status to the First Bank group and its GCP of ‘b-‘.

“We classify the likelihood of support from the Nigerian government to systemically important banks as uncertain and, as such, we do not factor into the ratings any uplift above the bank’s stand-alone credit profile (SACP).

“Our ratings on First Bank’s holding company FBNH are at the same level as the ratings on First Bank, reflecting the absence of debt at the holding company level. Under our criteria, we generally notch down from the GCP to reflect the structural subordination of the NOHC and its exposure to potential regulatory intervention.

“Nevertheless, in FBNH’s case, we take into account the absence of debt at the holding company level and believe that the risk of the NOHC defaulting is not commensurate with the ‘CCC’ rating category,” the agency said.

S&P said further that the stable outlook on First Bank reflects its view that the bank will maintain its CAR above the minimum requirement of 15% over the next 12 months, despite expectations that risk-weighted asset growth will moderately outpace internal capital generation. It also reflects our view that asset quality will continue to stabilize, although still at weak levels, while the bank will maintain its above average funding and adequate liquidity over the next 12 months.

However, the rating agency warned that, “We could lower the ratings on First Bank if we saw a sharp deterioration of capitalization due to higher risk weights (caused by a devaluation of the Naira) or weaker asset quality due to higher credit losses than anticipated.

“A positive rating action on First Bank would depend on the bank substantially improving its asset quality indicators, while maintaining its capitalization, business position, and funding and liquidity at levels commensurate with a higher rating.”