Fitch affirms FBN ratings at ‘B-‘, Negative after Board removal by CBN

Fitch has 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.

According to them the affirmation reflects our view that the impact of the Central Bank of Nigeria’s (CBN) replacement of FBNH and FBN’s boards, the identification of corporate governance failings and the imposition of corrective measures are tolerable at the rating level.

Their release said: “On 29 April 2021, the CBN removed the non-executive directors on the boards of FBNH and FBN -a domestic systemically important bank- and replaced them with its own appointees. The CBN says its actions were in the interest of financial stability and minority shareholders. It says it acted because FBN had made significant executive management changes, including replacing the CEO, without prior notice or approval of the regulator. The CBN also highlighted corporate governance failings pertaining to long-standing and problematic related-party exposures, and failure to comply with regulatory directives.

“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.

However, this 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.

“The Outlook remains Negative, reflecting FBNH’s pre-existing asset quality and capitalization weaknesses as well as the group’s corporate governance weaknesses highlighted by the CBN. These could put pressure on the ratings,”it posited.

It added that “FBNH is the non-operating holding company that owns FBN. FBNH’s ratings are aligned with those of FBN (which represents around 90% of consolidated group assets) due to high capital and liquidity fungibility within the group, and low double leverage (at 95% at end-1H20) at the holding company level.

“FBNH’s IDR is driven by its intrinsic creditworthiness, as defined by its ‘b-‘ Viability Rating (VR). The rating 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. Capitalisation is a factor of high importance to the VR.

“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’.”

The release posited that”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.”