By Ayomide Otitoju
International rating agency Fitch Ratings has revised its Long-Term Issuer Default Ratings (IDRs) for both FBN Holdings and its banking subsidiary, FirstBank, from stable to positive. This change reflects the recent revision of Nigeria’s outlook from stable to positive, affirming the IDR at ‘B-’.
In a commentary published on its website on Thursday, Fitch stated, “FBN and FBNH’s IDRs are driven by their standalone creditworthiness, as expressed by their viability ratings. The VRs reflect the banks’ high sovereign exposure relative to capital and the concentration of their operations in Nigeria. The Positive Outlooks on the Long-Term IDRs mirror that of the sovereign. The National Ratings balance a strong franchise, healthy profitability, and a stable funding profile against high credit concentrations and thin capital buffers.”
Fitch noted that the economic reforms initiated by President Bola Tinubu, such as reducing the fuel subsidy and overhauling monetary policy, including a significant devaluation of the naira, have positively impacted Nigeria’s creditworthiness and foreign exchange market liquidity, despite posing near-term macro-economic challenges for the banking sector.
FirstBank, Nigeria’s third-largest bank, which represents 10.7% of the banking system’s assets as of the end of 2023, maintains a strong franchise supporting a stable funding profile and low funding costs. The bank’s revenue diversification is notable, with non-interest income typically exceeding 40% of its operating income.
However, Fitch highlighted concerns about credit concentration, stating, “Single-borrower credit concentration is material, with the 20 largest loans representing 354% of FBN’s total equity at the end of Q1 2024. Oil and gas exposure, at 33% of gross loans at the end of 2023, is greater than the banking system average. Sovereign exposure through securities and cash reserves at the Central Bank of Nigeria (CBN) is high relative to FBNH’s Fitch Core Capital (FCC; 334% at the end of 2023).”
The agency also noted an increase in impaired loans (Stage 3 loans under IFRS 9), which rose slightly to 4.9% at the end of 2023, up from 4.7% at the end of 2022, due to challenges in the operating environment. “Specific loan loss allowance coverage of impaired loans was 40% at the end of 2023. Stage 2 loans remain high, concentrated in the oil and gas sector and largely US dollar-denominated, representing a key risk to asset quality, having inflated due to the devaluation. Fitch forecasts the impaired loans ratio will increase moderately in the near term,” the commentary read.
Fitch expects FBNH’s capitalization to improve moderately in the near term due to strong profitability and capital raisings to comply with FBN’s impending new paid-in capital requirement of N500 billion.
“FBNH has healthy profitability, as indicated by operating returns on risk-weighted assets averaging 3.5% over the past four years. Earnings benefit from a low cost of funding and strong non-interest income. Profitability improved notably in 2023 and Q1 2024, primarily driven by FX revaluation gains accompanying the naira devaluation due to a net long foreign-currency position,” the report stated.
The report also highlighted the strength of FBNH’s customer deposit base, which at the end of Q1 2024 comprised 73% of total non-equity funding. The high share of retail deposits and current and savings accounts (78% at the end of Q1 2024) supports funding stability and low funding costs. Depositor concentration is fairly low.
Fitch concluded, “The progress in reforms and the strengthened financial profile of FBN Holdings and FirstBank provide a positive outlook for the institutions as they navigate the challenging macro-economic environment.”
