Lagos Nigeria, 06 January 2020 — 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; with the outlook accorded as Stable. The ratings are valid until September 2020.
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 accorded ratings take into consideration FirstBank well established franchise and systemically important status, with the implied likelihood of support from the Federal Government of Nigeria if such support is required. However, the ratings remain constrained by the relatively improved but high risk position compared with other top-tier peers.
Having displayed deterioration in asset quality in the last four years to FY18, FirstBank’s gross non-performing loans (“NPL”) ratio improved to 12.4% at 3Q FY19 (FY18: 25.5%; FY17: 22.5%), albeit remains above the industry’s average for the period. The relative improvement in NPL ratio was mainly attributed to write-off of the largest delinquent loan amounting to N181.1bn (relating to the oil and gas sector and represents 9.5% of the loan portfolio at 1H FY19). Specifically, management has indicated that its ongoing remedial actions (including writing off of fully provisioned loans), loan restructuring, active recovery efforts, as well as cautious loan growth, would further support improved NPL ratio to a single digit by end-December 2019. Total loans provision coverage of impaired loans stood at 72.7% at FY18 (FY17: 53.8%).
FirstBank’s capitalisation declined at FY18, largely impacted by loan loss provisions adjustment to retained earnings on the back of implementation of IFRS 9 accounting standard. Consequently, shareholders’ funds declined by 23.3% to N478.2bn at the balance sheet date, and translated to a lower risk-weighted capital adequacy ratio of 17.3% at FY18 (FY17: 17.7%) and closed at 16.4% at 3Q FY19 (including profit for the period), against the regulatory minimum of 15% for international commercial banks.
The bank has a robust funding structure, backed by its strong retail franchise, and diversified deposit book, as evidenced by the single largest depositor accounting for a moderate 2.3% of total deposits at the balance sheet date. Liquidity risk is also considered low, with the bank’s regulatory liquidity ratio ranging between 40.1% and 54.9% throughout FY18 (FirstBank Nigeria only), against the regulatory minimum of 30%.
FirstBank reported a net profit before tax of N40.1bn in FY18, representing 26.9% year-on-year decline. While non-interest income rose by 10.5% on account of improved fees and commission income, net interest margin compression saw total operating income contract by 10.9% to N363.7bn. Also, operating expenses grew by 9.4%, translating to a higher cost to income ratio of 63.7% (FY17: 51.9%). Overall, profitability indicator ended down, with the return on average equity and asset (“ROaE” and “ROaA”) declining to 7.4% and 0.8% in FY18 (FY17: 8.6% and 1.1%) respectively. For the nine-month ended 30 September 2019, the bank recorded a pre-tax profit of N50.1bn, representing 18.4% growth over the corresponding period in 2018 and recorded a ROaE and ROaA of 11.9% and 1.1% respectively.
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, profitability and capitalisation metrics, coupled with a significant deterioration in the bank’s liquidity position could trigger a 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 (November 2018)
Rating Watch: Yes
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 (2006-18)
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 2018 (plus four years of comparative numbers), latest internal and/or external audit report to management, most recent year-to-date management accounts to 30 September 2019, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.