S&P Issues Negative Credit Rating Against First Bank; We Explain Why Its Very Bad

Nigeria’s largest bank by market capitalization has just received a piece of bad news. Ratings Agency Standard and Poors (S&P) has downgraded the bank’s credit rating from what in lay man’s terms will mean “this bank is in trouble”.

Before we explain further, let’s share a summary of the credit rating.

  • Economic slowdown and restrictive foreign exchange policy in Nigeria has undermined domestic banks’ creditworthiness.
  • As a result, First Bank of Nigeria’s (FirstBank’s) asset quality has deteriorated markedly in 2015 and credit losses jumped to levels beyond our base-case expectations. We anticipate that FirstBank’s credit cost will be high in 2016, thus weakening earnings and capitalization.
  • Therefore, we are lowering our long- and short-term global and national scale ratings on FirstBank to ‘B-/C’ from ‘B+/B’ and to ‘ngBB/ngB’ from ‘ngA-/ngA-2’, respectively, and placing the long-term ratings on CreditWatch negative.
  • The CreditWatch placement reflects our view that the bank’s financial profile could deteriorate further on the back of naira devaluation.

What does this mean?

First Bank has basically been downgraded for two main reasons, its exposure to the oil and gas sector and the impact of its a devaluation of the Naira on its foreign denominated loans. On both counts, First Bank actually fails woefully and we have reported this on this website severally. You can check these articles to get a better insight,

On The Brink: First Bank’s Latest Results Confirms Our Worst Fears…. and Here Is Why Devaluation Could Be Catastrophic For First Bank

Reading through the rating we observed that a lot of reference was made about the “devaluation” of the Naira implying that the report was done a few days to the introduction of the Flexible Exchange Rate Policy. This is even worse as they opine that they could rate the bank even worse if the CBN devalues the Naira. The Naira wasn’t devalued but was left to float which is in a way the same thing (Naira did depreciate).

For investors looking to buy First Bank perhaps you are looking at the current price (which was up 15% month to date) and wondering if its time to buy. As usual, we advice you follow the Fundamentals at Nairametrics and avoid bull traps. We won’t be touching this stock any time soon.

Find the full transcript of the Rating below. NB: Shareholders of First Bank should read with caution as this could be heart wrenching.

JOHANNESBURG (S&P Global Ratings) June 22, 2016--S&P Global Ratings today 
lowered its long- and short-term counterparty credit ratings on Nigeria-based
First Bank of Nigeria Ltd. (FirstBank) to 'B-/C' from 'B+/B'. We also lowered
our long- and short-term national scale ratings on FirstBank to 'ngBB/ngB'
from 'ngA-/ngA-2'. We placed the long-term ratings on CreditWatch with
negative implications.
At the same time, we placed on CreditWatch with negative implications our 'B-'
long-term global scale counterparty credit rating on FirstBank's nonoperating
holding company (NOHC), FBN Holdings PLC (FBNH). We lowered our long-term
national scale rating on FBNH to 'ngBB' from 'ngBB+' and also placed it on
CreditWatch negative. We affirmed our 'C' short-term global scale and 'ngB'
short-term national scale ratings on FBNH.
The rating actions reflect our view that FirstBank will continue to exhibit 
comparatively weaker asset quality metrics than rated top-tier banks in
Nigeria and lower earnings than its peers in 2016 due to high credit cost. The
low-oil-price environment, combined with high concentration in the oil and gas
sector, has undermined the bank’s revenue and earnings stability and asset
quality, resulting in markedly higher nonperforming loans (NPLs) than we
anticipated. We expect that moderate real GDP growth and a prolonged
depreciation of the local currency will drive up credit losses in the banking
system to between 3%-4% in 2016-2017 and threaten the capital position of some
Nigerian banks.
We observe that FirstBank has not been able to manage down some of its 
exposures in foreign currency, following the naira devaluation in 2014 and
early 2015, and as a result exhibits weaker underwriting standards than its
peers. Moreover, the bank exhibits high concentration risk: The top 20 loans
accounted for 43.5% of total loans at year-end 2015, with the largest two
exposures being nonperforming. As a result, we believe that FirstBank exhibits
a moderate business position, stemming from lapses in risk management.
Cost of risk jumped to 5.7% at year-end 2015 from 1.3% in 2014, and NPLs 
increased to 18% in the same period, compared with less than 3% in 2014. More
importantly, we expect cost of risk to remain high at about 5% over the next
12-18 months and NPLs to increase to around 22% compared with our estimate of
6% for the sector on average in 2016. The weak performance of the bank’s
portfolio stems from its significant concentration on foreign currency loans,
particularly the oil and gas related exposures. FirstBank’s share of foreign
currency lending was high at 45% of total loans in 2015. In a context of low
oil prices and a weakening naira, we expect additional impairments in 2016,
which will result in additional NPLs in this segment. At year-end 2015, the
bank restructured 12% of its portfolio, with the oil and gas sector accounting
for 70% of the restructured portfolio. We expect FirstBank to restructure some
loans, particularly in downstream oil and gas and small and midsize
enterprises in 2016, on the back of the naira depreciation. The 2015
performance and huge impairments prompted the bank to launch a review of its
risk-management process to improve loan approvals, risk monitoring, and
As a result, we now assess the bank’s risk position as moderate compared with 
adequate previously.
FirstBank reduced its off-balance-sheet exposures by 50% year on year at 
end-2015, which resulted in an improvement of its risk-adjusted capital (RAC)
ratio to 5.7%, compared with 4.6% a year earlier. However, we anticipate that
our RAC ratio calculation will deteriorate to weaker levels of about 3.8%-4.0%
over the next 12-18 months on the back of high impairments and naira
Furthermore, the restrictive foreign exchange regime, as well as lower oil 
prices and production, has resulted in a shortage in U.S. dollars, which is
undermining the banking sector's foreign currency liquidity position.
FirstBank raised U.S. dollar funding in 2013 and 2014, which should provide a
natural hedge to its capitalization in the scenario of naira devaluation.
However, there is a risk that the bank’s capital adequacy ratio could go below
the minimum regulatory requirement of 15%, should the naira devalue beyond our
base-case scenario.
The ratings on the bank reflect the overall creditworthiness of the FirstBank 
group, whose group credit profile (GCP) we assess at 'b-'. The bank is the
core component of the group, which is at the top of the Nigerian financial
services industry, with a leading deposit franchise and good naira liquidity.
Despite the bank's high systemic importance, the ratings on FirstBank reflect 
our assessment of the bank's core group status to the FirstBank group and its
stand-alone credit profile (SACP) at 'b-'. We classify the Nigerian government
as supportive of the domestic banking sector, but we do not add extraordinary
government support to the bank's SACP.
Our long- and short-term ratings on FirstBank's holding company FBNH are at 
the same level as the ratings on FirstBank, at 'B-/C', reflecting the absence
of debt at the holding company level. Under our criteria, we generally notch
down from the GCP to reflect the NOHC's structural subordination and exposure
to potential regulatory intervention. Nevertheless, in FBNH's case, we take
comfort from the absence of debt at the holding company level and believe that
the risk of default of the NOHC is not yet commensurate with the 'CCC' rating
category. Should we see any emergence of leverage at the NOHC level, its
rating will come under significant pressure.
The negative CreditWatch placement reflects our view that FirstBank’s capital 
adequacy ratio could fall below the minimum regulatory capital adequacy ratio
in case of a devaluation of the naira beyond our base-case scenario. If such a
scenario materialized, we would lower the ratings on FirstBank by one notch to
'CCC+'. We could also lower the ratings on FirstBank by one notch if asset
quality deteriorated further, leading to higher credit losses and NPLs than
The negative CreditWatch placement on FBNH reflects that on the bank. We would
lower our ratings on the NOHC by at least one notch if we lowered our ratings
on FirstBank. In addition, we could lower the ratings on the NOHC by more than
one notch if we saw any emergence of leverage at the NOHC level.
Alternatively, we could affirm the ratings on FirstBank at the current levels 
if the bank does not breach the minimum regulatory capital adequacy ratio upon
the effective devaluation of the naira. In such a case, we would also affirm
the ratings on FBNH, providing that all else remained unchanged.
We aim to resolve the CreditWatch within the next 90 days.
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