S&P Global Ratings has raised its long-term national scale rating on First Bank of Nigeria Ltd. (FirstBank) to ‘ngBBB+’ from ‘ngBBB’ and affirmed its ‘ngA-2’ short-term national scale rating.
The agency in its latest report also affirmed its ‘B-/B’ global scale long- and short-term ratings on the bank. The outlook stable.
At the same time, S&P affirmed its ‘ngBBB-/ngA-3’ long- and short-term national scale ratings and our ‘B-/B’ long- and short-term global scale ratings on FBN Holdings PLC (FBNH). The outlook is stable.
It noted that proactive capital management and stronger earnings will strengthen regulatory capital buffers.
FirstBank’s approach to capital management will help the group strengthen its capitalisation and support growth in Nigeria and the rest of Africa it noted.
“We expect the bank will optimise its capital structure, which in turn will lead to a stronger capital adequacy ratio (CAR) over the next 12 months. In addition, we anticipate strong earnings in 2023 will improve regulatory capital buffers to about 200 basis points (bps)-300 bps above the 15 percent regulatory minimum CAR.
“We therefore revised our assessment of the group’s stand-alone credit profile (SACP) by one notch to ‘b+’, in line with other top-tier banks in Nigeria. FirstBank’s CAR remained stable at 16.5 percent on end-June 2023, as stronger earnings retention–stemming from the revaluation of its derivatives position–balanced the significant increase in risk weighted assets.
“The bank’s foreign currency loans increased to 59percent of gross loans as of end-June 2023, from 49percent in 2022, largely driven by the depreciation of the naira. We forecast the group’s risk-adjusted capital (RAC) ratio to average 3.5percent in 2023-2024, which is neutral to our assessment of the group’s SACP. The bank’s quality of capital is sound, with S&P Global Ratings-adjusted common equity accounting for 100 percent of our total adjusted capital,” it stated.
The global rating agency further noted that the naira depreciation and rising interest rates will support revenue growth, and the bank has a net long foreign currency position; therefore, its earnings and capital will benefit from a weaker naira.
Earnings capacity will be supported by diversified revenue streams as non funded income accounted for 37percent of operating revenues and revenues from electronic transactions for 10% of operating revenues in 2022.
In addition, the group’s large agency banking network underpins a low cost of funding, which stood at 2.3percent in 2022.
This it stated, in turn will support the net interest margin in a context of rising interest rates.
“We, therefore, expect a return on average common equity ratio of about 30 percent in 2023.
“Impairment charges will increase due to the combination of the naira depreciation, and high inflation and interest rates, but this will be manageable. We expect cost of risk to rise to 1.8percent in 2023, compared with 1.5percent in 2022, as management adjusts its loan coverage to reflect the currency movement and some borrowers’ weakening creditworthiness.
Impairments at end-June 2023 equated the full amount of impairments taken for full-year 2022.
The ratings on FirstBank are constrained according to S&P by the sovereign ratings on Nigeria. FirstBank is the group’s principal subsidiary, comprising around 95percent of the group’s assets.
“We equalise our global scale rating on FBNH, FirstBank’s holding company, with the rating on FirstBank. Under our criteria, we generally notch down by up to two notches from the group credit profile (GCP) to reflect the structural subordination of the nonoperating holding company (NOHC) and its exposure to potential regulatory intervention.
“Nevertheless, in FBNH’s case, we do not consider the risk of the NOHC defaulting to be commensurate with the ‘CCC’ rating. There is no financial debt at the holding company, and we anticipate that double leverage will remain at manageable levels of close to 100 percent,” the ratings report stated.
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