Monday, May 10, 2021 / 08:40 AM / By Fitch Ratings / Header Image Credit: FBN Holdings

Fitchhas affirmed the Long-Term Issuer Default Ratings (IDRs) of FBN Holdings Plc(FBNH) and its primary operating subsidiary, First Bank of Nigeria Ltd (FBN),at 'B-' with a Negative Outlook. The affirmation reflects our view that theimpact of the Central Bank of Nigeria's (CBN) replacement of FBNH andFBN's boards, the identification of corporate governance failings and theimposition of corrective measures are tolerable at the rating level.

On 29 April 2021, the CBNremoved the non-executive directors on the boards of FBNH and FBN-a domestic systemically important bank- and replaced them with its ownappointees. The CBN says its actions were in the interest of financialstability and minority shareholders. It says it acted because FBN had madesignificant executive management changes, including replacing the CEO, withoutprior notice or approval of the regulator. The CBN also highlighted corporategovernance failings pertaining to long-standing and problematic related-partyexposures, and failure to comply with regulatory directives.

We have assessed the near-termfinancial impact of these actions on FBNH and FBNand believe this is tolerable at the rating level, even though the finaloutcome 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 andcapitalisation.

However, this does notconsider any possible additional actions by the CBN, especially if FBN fails toimplement the regulator's corrective measures or if there were any furtheruncovering of corporate governance irregularities.

The Outlook remainsNegative, reflecting FBNH's pre-existing asset quality and capitalisationweaknesses as well as the group's corporate governance weaknesses highlightedby the CBN. These could put pressure on the ratings.

Key Rating Drivers

FBNH isthe non-operating holding company that owns FBN. FBNH's ratings are alignedwith those of FBN (which represents around 90% of consolidated group assets)due to high capital and liquidity fungibility within the group, and low doubleleverage (at 95% at end-1H20) at the holding company level.

FBNH's IDR is driven byits intrinsic creditworthiness, as defined by its 'b-' Viability Rating (VR).The rating considers the group's exposure to Nigeria's volatile operatingenvironment and also factors in vulnerability in its capital position in thecontext of moderate earnings generation and asset-quality pressures, whereheadroom above the minimum regulatory capital requirements is also moderate.Capitalisation is a factor of high importance to the VR.

The new boards appointedto FBNH andFBN comprise individuals with sufficient experience and expertise. However, weview such major change as hugely disruptive. There are no changes in FBNH andFBN's executive management team.

We believe the governanceshortcomings cited by the CBN reflect poorly on FBNH's reputation and on thegroup's governance and control practices. As a result, we have revised down ourassessment of FBNH's Management and Strategy score to 'b-' from 'b'.

We also assigned anegative outlook to this factor, which reflects the uncertainty surroundingadditional remedial actions that the CBN may impose due to these related partyexposures as well as the potential for further uncovering of governanceirregularities. It also captures the lack of track record of the new board andits ability to restore confidence in FBNH and FBN.

Asset quality remains arating weakness. FBNH reported an improved impaired loan ratio of 7.9% atend-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 CBNwere classified as impaired, the ratio would be unlikely to be above 10%(excluding any new impaired loan generation from ordinary business).

Capitalisation remains arating weakness and has a high influence on the ratings. FBN reported a capitaladequacy ratio of 16.6% at end-1Q21 (excluding interim profits), which provideslimited headroom above its 15% minimum regulatory requirement. In addition,FBNH's capitalisation metrics remain vulnerable to asset-quality risks givensignificant capital encumbrance by unreserved impaired loans.

FBNH's profitability metricstypically lag behind those of the other large banks, mainly due to high loanimpairment charges. In our view, the corrective measures, including higherprovisioning on related-party loans or the sale of 'non-permissible' equityinvestments, would not materially affect profitability in the near term.

Our conversations withFBNH give us to understand there has been no adverse effect from recent eventson its funding and liquidity profile, which remains healthy. FBNH's fundingprofile continues to benefit from a substantial customer deposit base, whichprovides around 75% of its non-equity funding.

Senior Debt

FBN'ssenior debt issued by FBN Finance Company BV is rated in line with the bank'sLong-Term IDR, as the notes ultimately represent unconditional, seniorunsecured obligations of the bank, which rank pari passu with its other seniorunsecured obligations.

Unlessotherwise stated above, the key drivers of FBNH's other ratings and the ratingsof its subsidiaries are in line with our most recent Rating Action Commentary(See "Fitch Affirms FBN Holdings Plc at 'B-'; off RWN; OutlookNegative" published on 5 October 2020).

Factorsthat could, individually or collectively, lead to negative ratingaction/downgrade:

The ratings of FBNH would bedowngraded if the corporate governance shortcomings highlighted by the CBNpersist and if any further weaknesses are uncovered, potentially leading to agreater financial impact.

Reputational repercussionsthat would make it harder for FBNH to meet its pre-tax profit growth ambitions,or significant adjustments to the group's management and strategy, could alsocontribute to rating pressure.

Factors that could,individually or collectively, lead to positive rating action/upgrade:

Upside to the ratings isunlikely at present.

Best/Worst Case Rating Scenario

Internationalscale credit ratings of Financial Institutions and Covered Bond issuers have abest-case rating upgrade scenario (defined as the 99th percentile of ratingtransitions, measured in a positive direction) of three notches over athree-year rating horizon; and a worst-case rating downgrade scenario (definedas the 99th percentile of rating transitions, measured in a negative direction)of four notches over three years. The complete span of best- and worst-casescenario credit ratings for all rating categories ranges from 'AAA' to 'D'.Best- and worst-case scenario credit ratings are based on historicalperformance.

FBNHoldings Plc: Governance Structure: 4

First Bank of Nigeria Ltd:Governance Structure: 4

We believe the recentgovernance shortcomings could damage FBNH's reputation and reduce investorconfidence, and additional remedial actions from the CBN could damage FBNHfinancially, especially if regulatory investigations highlight the need forcertain loans to be classified as impaired or if loan loss provisioning needsto be strengthened. This could have a negative impact on capital adequacy.

We have therefore raisedFBNH's ESG Relevance Score for Governance Structure to '4' from '3', as thegroup's governance issues are a contributor to the Negative Outlook. This has anegative impact on the credit profile and is relevant to the rating inconjunction with other factors.

Unless otherwise disclosedin this section, the highest level of ESG credit relevance is a score of '3'.This means ESG issues are credit neutral or have only a minimal credit impacton the entity, either due to their nature or the way in which they are beingmanaged by the entity.

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