International rating agency, Fitch Ratings, has affirmed the Long-Term Issuer Default Ratings (IDRs) of FBN Holdings Plc (FBNH) and First Bank of Nigeria Ltd (FBN) at ‘B-‘ with a negative outlook in view of the impact of the recent changes made to the boards of both firms by the Central Bank of Nigeria. Fitch said its rating was based on the identification of corporate governance failings and the imposition of corrective measures was tolerable at the rating level.
Last month, the CBN removed the non-executive directors on the boards of FBNH and FBN which is categorised as a domestic systemically important bank- and replaced them with its own appointees.
The CBN says its actions were in the interest of financial stability and minority shareholders.
It says it acted because FBN had made significant executive management changes, including replacing the CEO, without prior notice or approval of the regulator.
The CBN also highlighted corporate governance failings pertaining to longFitch Affirms FBN Holdings’ Ratings standing and problematic related-party exposures, and failure to comply with regulatory directives. “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.” Fitch said the holding company’s IDR was 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).
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