Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of FBN Holdings Plc (FBNH) and FirstBank of Nigeria Ltd (FBN). The rating agency says the structure of FBNH’s funding base is credit positive. FBNH’s funding costs are lower than peers, reflecting FBN’s strong retail franchise while local currency liquidity ratios are consistently well above minimum regulatory limits. The bank’s strong earning potential and improving asset quality affirm its Viability Ratings (VR) at ‘b-’ and Long-Term National Ratings at ‘BB+(nga)’, writes COLLINS NWEZE.
From its creditworthiness, large capital and customer bases, as well as strong retail franchise, FBN Holdings has so many things going for it. Hence, when Fitch Ratings affirmed the Long-Term Issuer Default Ratings (IDR) of FBN Holdings Plc (FBNH) and FirstBank of Nigeria Ltd (FBN), the step was applauded by industry watchers.
FirstBank’s global ratings remained strong, and that explained why, despite the challenges faced by many Nigerian banks in accessing international capital markets because of refinancing risks, foreign banks lent to FBN throughout 2016 when several Nigerian banks experienced tight foreign currency liquidity positions. This, Fitch said, is an indication of market confidence in FBN Holdings, which it viewed positively.
The report, signed by Fitch Senior Director/Primary Analyst Janine Dow, Committee Chairperson Eric Dupont and Secondary Analyst Andrew Parkinson, indicated that the key rating drivers showed that FBN Holdings is the non-operating holding company which owns FBN or FirstBank. FBN Holdings ratings are aligned with those of FBN, its main operating subsidiary.
The FBN’s ratings are driven by its stand-alone creditworthiness hence, reducing the group’s dependence on contributions from FBN is a medium-term target.
According to Fitch, FBN generates around 90 per cent of the group’s revenues, but the objective is to increase contributions from other subsidiaries over time, while FBN represents around 95 per cent of consolidated group assets.
“FBN is one of Nigeria’s largest banks, with shares of 14 per cent and 17 per cent of banking sector loans and deposits, respectively. In the past, the group’s business model was reliant on large, often oil-related, corporate lending. Risk-control deficiencies, especially asset quality, are being addressed by new management,” Fitch said.
For instance, gross loans represent slightly below half of FBNH’s balance sheet with around 40 per cent of gross loans extended to the oil and gas sectors, many of which have been restructured. It said the restructuring efforts made to align debt servicing schedules with projected cash flows appear reasonable and the performance of restructured loans appears to be holding up well.
“Loan loss reserve coverage reached 52 per cent of impaired loans at end-September 2017, low compared with the average for large Nigerian banks peers (around 90 per cent). Unreserved impaired loans represented 36 per cent of Fitch Core Capital (FCC).FBNH’s margins are in line with peer averages and cost/income ratios are reasonable, considering the bank’s large branch network. FBN’s ability to generate revenues at pre-impairment operating level is strong,” it said.
According to Fitch Ratings, the structure of FBNH’s funding base is credit positive. “Stable customer deposits, largely held at FBN and demonstrating considerable stability, represent around two-thirds of FBNH’s total deposits. FBNH’s funding costs are lower than peers, reflecting FBN’s strong retail franchise. Local currency liquidity ratios are consistently well above minimum regulatory limits,” it said.
Foreign currency-denominated borrowings, which represent around five per cent of total funding, mainly comprise two Eurobond issues, maturing in August 2020 and July 2021.
It said the Negative Outlook reflects pressure on capital arising from a still large amount of unreserved impaired loans. FBNH’s and FBN’s National Ratings reflect their creditworthiness relative to the country’s best credit and relative to peers operating in Nigeria.
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s (B+/Negative) weak ability to provide support, particularly in foreign currency. In addition, there are no clear messages from the authorities regarding their willingness to support the banking system.
Fitch said FBN’s and FBNH’s ratings are primarily sensitive to a change in the level of loan loss reserve cover.
“At present, unreserved impaired loans weigh on capital adequacy and this has a high influence on the ratings. Once asset quality trends demonstrate sustained improvement, loan loss reserves cover a larger proportion of impaired loans, and assuming the operating environment does not deteriorate, the Outlook on the ratings would no longer be Negative and upgrades could be envisaged. If key weaknesses are addressed, FBNH and FBN could achieve multi-notch upgrades because their ratings are well below their natural levels considering FBN’s size and position within Nigeria’s banking sector,” Fitch said.
A downgrade could result from further weakness in already limited capital buffers, which could threaten FBN’s viability. Given the positive trends in asset quality improvement and capital retention, this is not our base case.
Performance indicators/earnings
FirstBank has for years relied on technology, innovative product development and quality customer services to define its leadership position in the market.
The bank has not only deepened its commitment to technology and quality services, but has also provided new products and services that give its customers value for their money. Fortunately, these investments are paying off speedily as seen in its rising profitability.
The new focus and approach to a technology-driven institution as a key to driving business is in line with the appointment of a Chief Information Officer (CIO) to oversee and drive the development of a full digital and transaction banking offering, through the digitising of the bank’s customer offerings by automating key processes. The bank is also strengthening technology infrastructure to drive efficiency across all business areas.
FBN Holdings Plc posted combined N870.6 billion gross earnings in 30 months. It recorded gross earnings of N581.8 billion for the full year ended December 31, 2016 and N288 billion for the half-year ended June 30, this year. These results are pointers that its customers, investors and other stakeholders should be confident of better years ahead.
The bank said its new product development and deployment of efficient technology helped it to achieve these milestones. For the full year, the FBN Holdings Plc net interest income stood at N304.4 billion, up 14.8 per cent from N265.2 billion while non-interest income of N165.5 billion, up 68.9 from N97.9 billion in the previous year’s figures.
Also, operating income was at N469.9 billion, up 29.4 per cent year-on-year from N363.1 billion while impairment charge for credit losses was at N226 billion as against N118.8 billion in 2015. Operating expenses as at N220.9 billion, down 0.8 per cent compared to N222.7 billion in 2015 while profit before tax of N22.9 billion, up 6.3 per cent as against N21.6 billion in 2015. The firm’s profit after tax stood at N17.1 billion, up 10.3 per cent when compared to N15.5 billion in 2015.
For the half-year, FBN Holdings posted N288.8 billion gross earnings in its unaudited half-year results for the period ended June 30, this year. The gross earnings represent 7.8 per cent year-on-year rise as against N267.9 billion recorded same period of last year. The bank’s net-interest income of N164.1 billion was up 30.2 per cent year-on-year against N126.1 billion same period of last year.
FirstBank Managing Director/CEO, Adesola Adeduntan, said: “The Commercial Banking group proved its overall earning capacity with a 6.9 per cent year-on-year increase in gross earnings to N260.9 billion mainly driven by our core business operations with stronger margins.
“At the same time, we intensified our credit resolution efforts resulting in the improvement of the asset quality position with the reduction in non-performing loans 25.7 per cent in the last quarter to 21.8 per cent at the Commercial Banking group. We are optimistic about further improvement in asset quality and the general quality of the loan book. In the next half of the year, we will be driving enhanced revenue generation, efficiencies and profitability towards an overall improved performance, while remaining focused on sustaining the portfolio management efforts.
