First Bank of Nigeria Ltd.’s regulatory capital has improved and the risk of breaching regulatory requirements has thus diminished, while the bank’s funding and liquidity remain a credit strength.
Although asset quality remains a weakness, the steadying of the oil price and new management’s efforts are helping to stabilize it.
We are therefore revising the outlook on FirstBank to stable from negative and affirming our global scale ratings at ‘B-/B’. In addition, we are raising the long-term national scale rating on FirstBank to ‘ngBB+’ from ‘ngBB’.
The stable outlook reflects our view that the bank will maintain its regulatory capital adequacy ratio (CAR) above the minimum requirement, continue to stabilize asset quality, although still at weak levels, and maintain its above average funding and adequate liquidity over the next 12 months.
S&P Global Ratings today revised its outlook on Nigeria-based First Bank of Nigeria Ltd. (FirstBank) tostable from negative. We affirmed our ‘B-/B’ long- and short-term counterparty credit ratings on FirstBank.
At the same time, we have raised our long-term national scale rating on FirstBank 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 nonoperating holding company (NOHC), FBN Holdings PLC (FBNH).
The rating actions reflect our view that FirstBank’s regulatory capital has 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, in our view, it is stabilizing thanks to the steadying of the oil price and new management’s efforts.
We expect FirstBank 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.
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 FirstBank 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% devaluationof the Nigerian naira (NGN) in 2017 and high credit costs.
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.
FirstBank raised U.S. dollar funding in 2013 and 2014, which underpins its long dollar position at year-end2016. The bank’s U.S. dollar-denominated subordinated debt provides a natural hedge to its capital position in the scenario of naira depreciation.
Positively, we view 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, FirstBank 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, FirstBank’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 FirstBank group, whose group credit profile (GCP) we 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 itwith a leading deposit franchise and good naira liquidity.
Despite the bank’s high systemic importance, the ratings on FirstBank reflect our assessment of the bank’s core group status to the FirstBank 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 FirstBank’s holding company FBNH are at the same level as the ratings on FirstBank, 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 stable outlook on FirstBank reflects our view that the bank will maintain its CAR above the minimum requirement of 15% over the next 12 months, despite our expectation 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.
We could lower the ratings on FirstBank if we saw a sharp deterioration of 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 FirstBank 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.