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Fitch Upgrades FBN Holdings Plc to ‘B’; Outlook Stable

Fitch Ratings has upgraded FBN Holdings Plc’s (FBNH) and First Bank of Nigeria Ltd’s (FBN) Long-Term Issuer Default Ratings (IDRs) to ‘B’ from ‘B-‘. The Outlooks are Stable. Fitch has also upgraded their Viability Ratings (VR) to ‘b’ from ‘b-‘.

Fitch has also upgraded the issuers’ National Long-Term Ratings to ‘A(nga)’ from ‘BBB(nga)’, reflecting their improved creditworthiness relative to that of other issuers in Nigeria.

The upgrade of the Long-Term IDRs follows that of the VRs, reflecting that corporate governance irregularities publicly raised by the Central Bank of Nigeria (CBN) in April 2021, including two longstanding related-party exposures, have largely been addressed and therefore risks to capitalisation have receded, helped by strong internal capital generation since the irregularities were raised.

According to management, the two related-party exposures highlighted by the CBN, which included equity and credit exposures to two companies of whom FBNH’s previous chairman was also chairman, have largely been disposed of and repaid. Fitch understands from management that FBNH and FBN have not been subject to penalties in relation to irregularities raised by the CBN in April 2021 and no further irregularities have been raised.

Fitch has withdrawn FBNH’s and FBN’s Support Ratings and Support Rating Floors as they are no longer relevant to the agency’s coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned Government Support Ratings (GSR) of ‘no support’ (ns) to both issuers.

Key Rating Drivers

The issuers’ Long-Term IDRs are driven by their standalone creditworthiness, as expressed by their Viability Ratings (VR) of ‘b’. The VRs balance a strong franchise, healthy profitability, improved capitalisation and a stable funding profile against material credit concentrations and remaining asset- quality weaknesses.

The National Ratings are driven by FBNH’s and FBN’s standalone strengths. They are at the higher end of the scale given FBNH’s and FBN’s comparative strong franchise, profitability, capitalisation and funding profile.

VRs Equalised with Group VR: FBNH is a non-operating bank holding company (BHC). Its VR is equalised with the group VR, derived from the consolidated risk assessment of the group, due to the absence of double leverage and high fungibility of capital and liquidity. As the main operating entity, FBN’s VR is also equalised with the group VR.

Strong Franchise: FBN is the third-largest bank in Nigeria, representing 11% of domestic banking-system assets at end-2021. A strong franchise supports a stable funding profile and a low cost of funding. Revenue diversification is strong, with non-interest income representing 48% of operating income in 2021.

Material Credit Concentrations: Single-borrower credit concentration is material, with the 20-largest loans representing 157% of Fitch Core Capital (FCC) at end-1H22. Oil and gas exposure (30% of net loans at end-2021) is higher than the banking-system average and weighted towards higher-risk upstream and services sub-segments.

Improved Asset Quality: FBN’s impaired loans (Stage 3 loans under IFRS 9) ratio has declined significantly to 5.6% at end-1H22 from a peak of 25% at end-2018 as a result of sizeable write-offs, successful restructurings and recoveries and, more recently, the flattering effect of strong loan growth. Stage 2 loans remain significant (15% of gross loans at end-1H22) but Fitch expects these to decline as oil and gas exposures return to performing status. Specific loan loss allowance coverage of impaired loans (49% at end-1H22) is acceptable in view of its collateral levels.

Healthy Profitability: FBNH delivers healthy profitability, as indicated by an operating return on risk-weighted assets (RWAs) averaging 2.6% over the past four years (4% in 2021, underpinned by large recoveries on a previously written-off loan). Earnings benefit from a low cost of funding and strong non-interest income but are constrained by a high cost-to-income ratio (74% in 2021) and significant loan impairment charges (LICs) in recent years.

Improved Capitalisation: FBNH’s FCC ratio (19.1% at end-1H22) has been on an upward trend in recent years, as a result of strong internal capital generation, which has been influenced by a modest dividend payout ratio. Impaired loans net of specific loan loss allowances has declined as a share of FCC in recent years to a moderate 12% at end-1H22. Pre-impairment operating profit is sizeable (an annualised 5.1% of average gross loans in 1H22), providing a reasonable buffer to absorb LICs without affecting capital.

Stable Funding Profile: FBN’s customer deposit base (76% of total funding at end-1H22) comprises a high share of retail deposits (64% at end-2021) and current and savings accounts (81% at end-1H22), supporting funding stability and a low cost of funding. Depositor concentration is fairly low. Liquidity coverage is comfortable in local and foreign currencies.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A sovereign downgrade would result in a downgrade of the Long-Term IDRs given that FBN and FBNH do not meet Fitch’s criteria to be rated above the sovereign.

An increase in the impaired loan ratio to significantly above 10% that results in markedly weaker performance and very thin buffers over regulatory capital requirements or a sharp decline in the FCC ratio without clear prospects to restore capital would pressure the VRs.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the Long-Term IDRs would require a sovereign upgrade combined with an extended record of asset-quality performance.

Other Debt and Issuer Ratings: Key Rating Drivers

Senior unsecured debt issued through FBN Finance Company B.V. is rated at the same level as FBN’s Long-Term IDR, reflecting Fitch’s view that the likelihood of default on these obligations is the same as the likelihood of default of the bank. The Recovery Rating of these notes is ‘RR4’, indicating average recovery prospects.

Government support to commercial banks cannot be relied on given Nigeria’s weak ability to provide support, particularly in foreign currencies. The GSR is therefore ‘no support’, reflecting our view that senior creditors cannot rely on receiving full and timely extraordinary support.

Other Debt and Issuer Ratings: Rating Sensitivities

The rating of the senior unsecured debt would move in tandem with FBN’s Long-Term IDR.

An upgrade of FBN’s GSR is unlikely as it would require a material improvement in Nigeria’s financial flexibility. An upgrade of FBNH’s GSR is unlikely given its low systemic importance as a non-operating BHC.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. 

References for Substantially Material Source Cited as Key Driver of Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

FBNH’s and FBN’s ESG Relevance Score for corporate governance has been changed to ‘3’ from ‘4’, reflecting our view that corporate governance irregularities publicly raised by the CBN have been addressed without penalty and therefore the factor is no longer relevant to their ratings.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity

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