Fitch upgrades FirstBank outlook to positive

International rating agency, Fitch Ratings has revised its Long-Term Issuer Default Ratings of both FBN Holdings and its banking subsidiary, FirstBank, to positive from stable.

In a rating action commentary on its website on Thursday, Fitch said that the upgrade mirrored the recent revision done on Nigeria’s outlook, which moved from stable to positive and affirmed the IDR at ‘B-’.

Fitch said, “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.”

The rating agency added that the reforms pursued by President Bola Tinubu; reducing the fuel subsidy and overhauling monetary policy, including allowing the naira to devalue by over 65 per cent, were positive for Nigeria’s creditworthiness and FX market liquidity but posed near-term macro-economic challenges for the banking sector.

According to the rating agency, FirstBank, which is Nigeria’s third-largest bank, (representing 10.7 per cent of banking system assets at end-2023), has a strong franchise that supports a stable funding profile and low funding costs, its revenue diversification is significant, with non-interest income typically exceeding 40 per cent of operating income.

However, the rating agency highlighted, “Single-borrower credit concentration is material, with the 20 largest loans representing 354 per cent of FBN’s total equity at end-1Q24. Oil and gas exposure (end-2023: 33 per cent of gross loans) 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; end-2023: 334per cent).”

Of concern was also the fact that FBNH’s impaired loans (Stage 3 loans under IFRS 9) ratio increased slightly to 4.9 per cent at end-2023 (end-2022: 4.7 per cent) due to operating environment challenges.

“Specific loan loss allowance coverage of impaired loans was 40 per cent at end-2023. Stage 2 loans remain high (end-2023: 20 per cent of gross loans; concentrated in the oil and gas sector and largely US dollar-denominated) and represent 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 expected capitalisation to improve moderately in the near term as a result of strong profitability and capital raisings to comply with FBN’s impending new paid-in capital requirement of N500bn.

“FBNH has healthy profitability, as indicated by operating returns on risk-weighted assets averaging 3.5 per cent over the past four years. Earnings benefit from a low cost of funding and strong non-interest income. Profitability improved notably in 2023 and 1Q24, primarily driven by FX revaluation gains accompanying the naira devaluation due to a net long foreign-currency position.

“FBNH’s customer deposit base (end-1Q24: 73 per cent of total non-equity funding) comprises a high share of retail deposits and current and savings accounts (end-1Q24: 78 per cent), supporting funding stability and low funding costs. Depositor concentration is fairly low,” the report concluded.