- Says the board’s replacement will however not impact bank’s profitability
Foremost rating agency, Fitch Rating has lambasted First Bank’s former management for what it describes as the group’s poor governance and control practices. This thus has led the agency to drop down FBNH’s Management and Strategy score to ‘b-‘ from ‘b’.
The rating agency however says the recent replacement of the board of First Bank will not hinder the bank’s profitability as well as asset quality, maintaining the bank’s rating at B- with a negative outlook.
This was contained in a statement it issued on Friday and sighted by Exclusive Africa. According to the rating agency, it stated thus:
“We have assessed the near-term financial impact of these actions on FBNH and FBN and believe this is tolerable at the rating level, even though the final outcome is uncertain. In our view, any remedial actions imposed by the CBN, including a potential reclassification of related-party exposures as impaired, will not have a material effect on the group’s asset quality, profitability and capitalisation.
However, this does not consider any possible additional actions by the CBN, especially if FBN fails to implement the regulator’s corrective measures or if there were any further uncovering of corporate governance irregularities.
The Outlook remains Negative, reflecting FBNH’s pre-existing asset quality and capitalisation weaknesses as well as the group’s corporate governance weaknesses highlighted by the CBN. These could put pressure on the ratings.”
According to the rating agency, these are what drives First Bank’s rating:
FBNH is the non-operating holding company that owns FBN. FBNH’s ratings are aligned with those of FBN (which represents around 90% of consolidated group assets) due to high capital and liquidity fungibility within the group, and low double leverage (at 95% at end-1H20) at the holding company level.
FBNH’s IDR is driven by its intrinsic creditworthiness, as defined by its ‘b-‘ Viability Rating (VR). The rating considers the group’s exposure to Nigeria’s volatile operating environment and also factors in vulnerability in its capital position in the context of moderate earnings generation and asset-quality pressures, where headroom above the minimum regulatory capital requirements is also moderate. Capitalisation is a factor of high importance to the VR.
The new boards appointed to FBNH and FBN comprise individuals with sufficient experience and expertise. However, we view such major change as hugely disruptive. There are no changes in FBNH and FBN’s executive management team.
We believe the governance shortcomings cited by the CBN reflect poorly on FBNH’s reputation and on the group’s governance and control practices. As a result, we have revised down our assessment of FBNH’s Management and Strategy score to ‘b-‘ from ‘b’.
We also assigned a negative outlook to this factor, which reflects the uncertainty surrounding additional remedial actions that the CBN may impose due to these related party exposures as well as the potential for further uncovering of governance irregularities. It also captures the lack of track record of the new board and its ability to restore confidence in FBNH and FBN.
Asset quality remains a rating weakness. FBNH reported an improved impaired loan ratio of 7.9% at end-1Q21 (end-2020: 7.7%). However, FBNH’s reported reserve coverage of 54.5% at end-1Q21 (end-2020: 48%) remains significantly weaker than domestic peers’. Our assessment indicates that if the related-party loan highlighted by the CBN were classified as impaired, the ratio would be unlikely to be above 10% (excluding any new impaired loan generation from ordinary business).
Capitalisation remains a rating weakness and has a high influence on the ratings. FBN reported a capital adequacy ratio of 16.6% at end-1Q21 (excluding interim profits), which provides limited headroom above its 15% minimum regulatory requirement. In addition, FBNH’s capitalisation metrics remain vulnerable to asset-quality risks given significant capital encumbrance by unreserved impaired loans.
FBNH’s profitability metrics typically lag behind those of the other large banks, mainly due to high loan impairment charges. In our view, the corrective measures, including higher provisioning on related-party loans or the sale of ‘non-permissible’ equity investments, would not materially affect profitability in the near term.
Our conversations with FBNH give us to understand there has been no adverse effect from recent events on its funding and liquidity profile, which remains healthy. FBNH’s funding profile continues to benefit from a substantial customer deposit base, which provides around 75% of its non-equity funding.
