Fitch Ratings Upgrades FBN Holdings and FirstBank to Positive Ratings
Fitch Ratings has revised its Long-Term Issuer Default Ratings (IDRs) for FBN Holdings and its banking subsidiary, FirstBank, upgrading their status from stable to positive. This change comes in the wake of a similar upgrade in Nigeria’s outlook, which Fitch recently revised from stable to positive while affirming the IDR at ‘B-‘.
In its commentary, Fitch noted that the upgrade reflects FBN and FBN Holdings’ standalone creditworthiness, which is expressed through 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 agency explained.
Fitch attributed the improved outlook to the economic reforms pursued by President Bola Tinubu. These reforms include reducing the fuel subsidy and overhauling monetary policy, notably allowing the naira to devalue by over 65 per cent. While these measures have enhanced Nigeria’s creditworthiness and foreign exchange market liquidity, they also pose near-term macroeconomic challenges for the banking sector.
FirstBank, which is Nigeria’s third-largest bank, accounting for 10.7 per cent of the country’s banking system assets at the end of 2023, was highlighted for its strong franchise. This strength supports a stable funding profile and low funding costs, with significant revenue diversification; non-interest income typically exceeds 40 per cent of operating income.
However, Fitch also pointed out substantial risks. “Single-borrower credit concentration is material, with the 20 largest loans representing 354 per cent of FBN’s total equity at the end of 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: 334 per cent),” the agency noted.
Additionally, the report flagged an increase in FBNH’s impaired loans ratio, which rose slightly to 4.9 per cent at the end of 2023 from 4.7 per cent at the end of 2022 due to operating environment challenges. “Specific loan loss allowance coverage of impaired loans was 40 per cent at the end of 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 also expects capitalisation to improve moderately in the near term due to strong profitability and capital raisings necessary 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 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,” the report added.
The commentary concluded by noting the robustness of FBNH’s customer deposit base, which comprised 73 per cent of total non-equity funding at the end of 1Q24. The high share of retail deposits and current and savings accounts (78 per cent at end-1Q24) supports funding stability and low funding costs, with depositor concentration remaining fairly low.
