The Central Bank of Nigeria’s (CBN) recent dissolution and reconstitution of the boards of FBN Holdings and First Bank of Nigeria Ltd, will not affect the group’s profitability and asset quality, Fitch Ratings has said.
In a statement on Saturday, the agency said it was rating the bank at B- with a negative outlook, adding that the development: “Reflects its view that the impact of the Central Bank of Nigeria’s replacement of FBNH and FBN Ltd boards, the identification of corporate governance failings and the imposition of corrective measures are tolerable at the rating level.”
It further stated: “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.”
Fitch, however, said that its position on recent developments at the bank 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.”
In fact, it stated that: “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 added that FBNH’s Issuer Default Rating (IDR) is driven by its intrinsic creditworthiness, as defined by its ‘b-‘ Viability Rating (VR), which, according to the agency: “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.”
According to the agency: “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,” it added.
Fitch also stated: “Asset quality remains a rating weakness. FBNH reported an improved impaired loan ratio of 7.9 per cent at end-1Q21 (end-2020: 7.7 per cent). However, FBNH’s reported reserve coverage of 54.5 per cent at end-1Q21 (end-2020: 48 per cent) 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 per cent (excluding any new impaired loan generation from ordinary business).”
On 29 April 2021, the CBN removed the non-executive directors on the boards of FBNH and FBN and replaced them with new individuals appointed by the apex bank.
The CBN gave several reasons for its action including the unapproved change of the bank’s MD/CEO by the former board, corporate governance failings pertaining to long-standing insider loans that were affecting the bank’s capitalisation and failure to comply with regulatory directives.
