Growing a Credit Risk Management Environment

Obinna Chima highlights efforts by FirstBank Nigeria Limited to strengthen its credit risk management system

The Nigerian banking industry has witnessed sundry challenges in the past few years.
In fact, the financial institutions were exposed to multiple threats when the country slipped into recession and was faced with severe shortages in foreign exchange. Consequently, banks had to struggle with declining operating profitability, sluggish credit growth, fast asset quality deterioration, weakening capitalisation and pressure on their credit profiles.

In view of the macro-economic challenges in the country then, the CBN, had announced that it had granted a one-off forbearance to banks to write-off their fully provided for non-performing loans (NPLs) without waiting for the mandatory one year.

But since the second half of last year, the country has witnessed improved macro-economic conditions owing to the improved forex inflow since the introduction of the Investors’ and Exporters’ (I & E) window and improved crude oil price.

Nigerian banks on their part have continued to pay greater attention to improving credit risk management in their institutions to forestall systemic risk.
This reflected in Fitch Ratings’ recent affirmation of Long-Term Issuer Default Ratings (IDR) of FBN Holdings Plc (FBNH) and First Bank of Nigeria Limited (FBN).
The banks’ Viability Ratings (VR) was also affirmed at ‘b-‘ and the Support Ratings at ‘5’.
The Long-Term National Ratings was also affirmed at ‘BB+(nga)’.

Key Rating Drivers

FBNH is the non-operating holding company which owns FBN. FBNH’s ratings are aligned with those of FBN, its main operating subsidiary.
FBN’s ratings are driven by its standalone creditworthiness.
According to the rating agency, reducing the group’s dependence on contributions from FBN is a medium-term target.

Currently, FBN generates around 90 per cent of the group’s revenues, but the objective is to increase contributions from other subsidiaries over time.
FBN represents around 95 per cent of consolidated group assets.
FBN is one of Nigeria’s largest banks, with shares of 14 per cent and 17 per cent of banking sector loans and deposits, respectively.

On the other hand, Fitch added: “FBNH has a strong franchise but its asset quality is troubled and capital levels are not commensurate with risk, in our view, reflecting high impaired loans.
“In the past, the group’s business model was reliant on large, often oil-related, corporate lending. Risk-control deficiencies are being addressed by new management.
“Gross loans represent slightly below half of FBNH’s balance sheet. Around 40 per cent of gross loans are extended to the oil and gas sectors, many of which have been restructured.

“In our view, restructuring efforts made to align debt servicing schedules with projected cash flows appear reasonable and the performance of restructured loans appears to be holding up well.”

It noted that the financial institution’s loan loss reserve coverage reached 52 per cent of impaired loans at the end of September 2017, low compared with the average for large Nigerian banks peers (around 90%). Unreserved impaired loans represented 36 per cent of Fitch Core Capital (FCC).
FBNH’s capital ratios, according to the agency, are low compared with peers and capital weakness, which has a high influence on the ratings.

“FBNH’s margins are in line with peer averages and cost/income ratios are reasonable, considering the bank’s large branch network.
“FBN’s ability to generate revenues at pre-impairment operating level is strong, but high impairment charges have impacted earnings and profitability in 2016 and 2017.
“The structure of FBNH’s funding base is credit positive. Stable customer deposits, largely held at FBN and demonstrating considerable stability, represent around two-thirds of FBNH’s total deposits.

“FBNH’s funding costs are lower than peers, reflecting FBN’s strong retail franchise. Local currency liquidity ratios are consistently well above minimum regulatory limits.
“Foreign currency (FC)-denominated borrowings, which represent around five per cent of total funding, mainly comprise two Eurobond issues, maturing in August 2020 and July 2021,” it noted.
It, however, pointed out that access to international capital markets could be unsteady for Nigerian banks, exposing them to refinancing risks.

“But international banks continued to lend to FBN throughout 2016 when several Nigerian banks experienced tight FC liquidity positions.
“This is an indication of market confidence in the group which we view positively,” it further added.
Furthermore, Fitch stated that the Negative Outlook reflects pressure on capital arising from a still large amount of unreserved impaired loans.

Also, FBNH’s and FBN’s National Ratings reflect their creditworthiness relative to the country’s best credit and relative to peers operating in Nigeria, they noted.
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria’s (B+/Negative) weak ability to provide support, particularly in FC.
In addition, it pointed out that there are no clear messages from the authorities regarding their willingness to support the banking system.

“Therefore, the Support Rating Floor of all Nigerian banks is ‘No Floor’ and all Support Ratings are ‘5’. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.
“The subordinated debt issued by FBN Finance B.V., a special purpose company established by the group for the purpose of debt issuance, is rated one notch below FBN’s VR. Recoveries on the notes in the event of default are considered to be below average, as evidenced by a Recovery Rating (RR) of ‘RR5’.

“FBN’s and FBNH’s ratings are primarily sensitive to a change in the level of loan loss reserve cover. At present, unreserved impaired loans weigh on capital adequacy and this has a high influence on the ratings. “Once asset quality trends demonstrate sustained improvement, loan loss reserves cover a larger proportion of impaired loans, and assuming the operating environment does not deteriorate, the Outlook on the ratings would no longer be Negative and upgrades could be envisaged.

“If key weaknesses are addressed, FBNH and FBN could achieve multi-notch upgrades because their ratings are well below their natural levels considering FBN’s size and position within Nigeria’s banking sector,” it added.

The Managing Director/CEO of First Bank of Nigeria Limited and Subsidiaries, Dr. Adesola Adeduntan, recently explained that his team had been working hard to ensure it improves on its credit management system.
He explained: “If you followed our results quarter on quarter (Q-on-Q), you would discover that our NPLs have been trending downwards. We have come down from close to 30 per cent and we are now below 20per cent which is quite significant.

“As we journey into 2018, we expect further reduction in the course of 2018 until we work it down to a level we believe is commensurate with our type of business. What is also important to highlight over NPLs is the very strong growth that the bank has recorded in terms of top-line numbers which is quite significant for a bank of our size.

“We have grown about six percent year on year (YoY). We are strategically repositioning the institution more as a transactions-led institution rather than a credit-led institution and that basically has defined what we are doing around digital banking and transaction banking.

“Today as I speak with you, we are the first financial institution in Nigeria and the second financial institution in Africa that has issued 10million cards to its customers. Also, as I speak to you today, we have close to 6 million customers on our various digital banking platforms and that is also quite significant and is the largest number in the industry.”

He said the bank was focused on achieving itsstrategic objectives of migrating more and more of its customers away from branches to thevarious digital platforms.
According to the FirstBank CEO, over 75 percent of the bank’s customer induced transactions are initiated via our alternative channels.

“This means that less than 25 percent of our transactions take place in the branches. When you are looking at that bank that has been quite successful in making the transition from being a branch-led type of bank into a digital-led institution, it is FirstBank,” he added.