September 23, 2020
by S & P Global Ratings
- Lower oil prices and the impact of COVID-19 continue to hinder economic activity in Nigeria, and we foresee a moderate deterioration of First Bank of Nigeria’s (FirstBank’s) asset quality.
- However, we expect FirstBank’s regulatory capital ratios will remain well above the minimum requirement following an equity injection after the sale of the group’s insurance subsidiary.
- We are affirming our ‘B-/B’ global scale ratings and ‘ngBBB-/ngA-3’ Nigeria national scale ratings on FirstBank and its parent, FBN Holdings PLC.
- The outlooks are stable because we expect that both entities can maintain a broadly stable credit profile over the next 12 months.
S&P Global Ratings today affirmed its ‘B-/B’ long- and short-term issuer credit ratings on First Bank of Nigeria Ltd. (FirstBank) and its nonoperating holding company (NOHC), FBN Holdings PLC (FBNH). The outlooks on both entities are stable.
We also affirmed our ‘ngBBB-/ngA-3’ long- and short-term Nigeria national scale ratings on both entities.
The affirmation reflects our view that FirstBank’s regulatory capital ratios will remain well above the minimum requirement over the next 12-24 months, following an equity injection from FBNH after the sale of the group’s insurance subsidiary. We expect that FirstBank’s asset quality indicators will deteriorate moderately over the same period because of the economic downturn in Nigeria due to the COVID-19 pandemic and decline in oil prices. We expect the group’s earnings will benefit from its expanded agency and digital banking franchise, despite its relatively high cost-to-income ratio, which we forecast will average 60% by 2022.
We note that, as of June 30, 2020, the group’s nonperforming loans (NPLs) had improved to 8.8% of total loans compared with 25% at year-end 2018. This was due to FirstBank’s aggressive remediation, recovery, and write-off of legacy problem exposures and strengthening of its risk management capabilities. However, NPL coverage by loan loss provision decreased to around 42% at midyear 2020. We foresee a slight improvement in this ratio over the next 12-24 months as the bank continues to build provisions and NPLs increase relatively moderately.
We also expect FirstBank’s risk-adjusted capital ratio will remain weak at 3.3%-3.6% through 2022 but this is neutral to the ratings. The regulatory capital ratio has improved to 16.5% (excluding unappropriated profits) following the capital increase. Since the increase was not debt funded, it did not lead to higher double leverage for FBNH.
Similar to rated domestic peers, we expect the group’s funding to remain largely contractually short term; however, actuarial data suggests that funding is more stable. This is manageable, given the stable funding ratio remains well in excess of 100% while its ratio of broad liquid assets to short-term funding amounted to 2.8x in second-quarter 2020. Net broad liquid assets covered short-term deposits by around 60% during the same period. The group holds a long position in U.S. dollars, stemming from domiciliary accounts and funding raised in dollars in the past four years. In addition, the group’s U.S. dollar position provides a natural hedge to its capital position in the event of a naira devaluation.
The stable outlook on FirstBank, the main operating entity, reflects our view that the bank will maintain its regulatory capital ratio above the minimum requirement of 15%, and broadly stable liquidity profile, over the next 12 months. The outlook on FBNH reflects that on the bank.
We would lower the ratings on FirstBank over the next 12 months if capital adequacy declines sharply due to a steeper depreciation of the naira than we expect a sharp deterioration of asset quality, or pressure on the bank’s U.S. dollar liquidity position due to tighter supply in the banking sector. We would lower the ratings on FBNH if we lowered the ratings on FirstBank or saw material double leverage at the holding company.
A positive rating action on FirstBank over the next 12 months would depend on there being a similar action on Nigeria and on an improvement in FirstBank’s asset-quality indicators, all else being equal. We would not raise the ratings on FBNH if we raised the ratings on FirstBank because of our view of the structural subordination of FBNH’s creditors.