Lagos Nigeria, 04 December 2018 — 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. The ratings have been placed on ‘Rating Watch’, which GCR expects to resolve by April 2019.
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 strong market position, adequate capitalisation, funding and liquidity. Cognizance is also taken of the likelihood of support from the Federal Government of Nigeria given the systemically important status of the bank. The ratings are however restrained by the weak asset quality relative to peers.
Capitalisation is considered adequate for current risk level, with the risk weighted capital adequacy ratio registered at 17.7% at FY17 (FY16: 17.8%), above the regulatory minimum of 15%. Shareholders’ funds grew by 21.4% to N627.6bn at FY17, largely underpinned by internal capital generation.
Key profitability metrics improved in FY17 supported by a significant (337.4%) growth in net profit after tax. Growth in profit came from a significant (37.2%) reduction in impairment charge. Notwithstanding the cost containment measures (which resulted in a moderate rise in operating expenses by 5.2%), an outpaced 6.2% decline in total operating income saw cost to income ratio expand to 51.4% (FY16: 45.8%). Overall, return on average equity and asset strengthened to 9.0% and 1.1% at FY17 (FY16: 2.3% and 0.3%) respectively.
Notwithstanding the gradual improvement recorded, FirstBank’s weak asset quality position (loans and advances portfolio) has remained a key rating concern since the past three years. The non-performing loan (“NPL”) ratio ended at 22.5%, 20.5% and 19.6% at FY17, 1H FY18 and 3Q FY18 respectively. However, management indications of a significant improvement in the NPL ratio in the medium term through its intensified recovery efforts, remedial action on delinquent assets (predominantly legacy exposures) and cautious lending approach provide some level of comfort in this regard. Thus, the accorded “Rating Watch” status implies that the rating will be reviewed within the next six month based on the asset quality position.
Funding and liquidity are adequate, with the regulatory liquidity ratio registered at 52.7% in FY17 (for FirstBank Nigeria only), against the regulatory minimum of 30%. Furthermore, the bank’s liquid and trading assets to total short-term funding ratio of 40.6% compares favourably with peers’ average. Deposit concentration is low, with top twenty depositors accounting for 10.1% of total deposits.
A positive rating action is dependent on a rebound to strong asset quality and profitability as well as further improvement in competitive positioning. However, sustained pressure on asset quality and profitability, coupled with a significant deterioration in the bank’s liquidity and capital metrics 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.
NATIONAL SCALE RATINGS HISTORY
Initial rating (September 2006)
Rating outlook: Positive
Last rating (September 2017)
Rating outlook: Stable
Yinka Adeoti/Julius Adekeye
Credit Analyst/Senior Credit Analyst
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
FirstBank rating reports (2006-17)
Glossary of Terms/Ratios, February 2016
RATING LIMITATIONS AND DISCLAIMERS
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The ratings were solicited by, or on behalf of, First Bank of Nigeria Limited, and therefore, GCR has been compensated for the provision of the ratings.
First Bank of Nigeria Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings above were disclosed to First Bank of Nigeria Limited with no contestation of/changes to the ratings.
The information received from First Bank of Nigeria Limited and other reliable third parties to accord the credit rating included the latest audited annual financial statements as at 31 December 2017 (plus four years of comparative numbers), latest internal and/or external audit report to management, most recent year-to-date management accounts to 30 June 2018, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.