A 27 percent growth in profit for First Bank of Nigeria Holdings (FBNH) last year was influenced by improvements in asset quality of the big lender due to its aggressive risk management. In 2020, a bleaker outlook for Nigeria will test further asset quality recovery.
Impairment charges for credit loss of FBNH in 2019 fell by about 42 percent to N51.1bn, its lowest in at least five years which supported profit after tax of N73.67bn for the year.
The decline in provision for bad loans followed a risk portfolio clean-up and the bank actively pursuing recoveries on loans written-off.
This saw Non-performing Loan (NPL) ratio slid from 24.7 percent to 9.9 percent in 2019 (a 5-year low) following two consecutive years of decline after a 2016 spike.
By sector, FBNH’S biggest NPLS at the end of 2019 was in the finance and insurance sector (18.2 percent in 2019 vs 67.7 percent in 2018). The second-biggest concentration of bad loans was in agriculture (18.0 percent in 2019 vs 27.2 percent in 2018) while Oil & Gas upstream was 5.5 percent (vs 43.2 percent) and downstream had 8.1 percent (vs 11 percent in 2018).
NPL Coverage fell from 80.3 percent to 47.5 percent year-on-year.
Also, the cost of risk fell to 2.5 percent while net loan and advances to customers rose 10.9 percent.
In 2019, FBNH reduced the proportion of total debt held in foreign currency unit from 53 percent to 46 percent while it reduced exposure to the Oil & Gas sector.
Of N1.619trn gross loan last year, Oil & Gas Upstream accounted for 17.9 percent, down from 24.2 percent in 2018 although for downstream of the sector loan exposure rose from 14.1 percent to 16.5 percent.
While the lender has said “focus is on further improving current metrics”, the banking industry will face headwinds on the heels of bleaker prospects on the Nigerian economy due to a double whammy of the coronavirus pandemic and associated decline in oil price.
“We expect higher asset quality ratios in 2020, given lower oil prices and weaker Nigerian Naira,” said Lagos-based Chapel Hill Denham in a note to client. “It is, however, worth noting that the oil and gas sector contributed 31 percent to (FBNH) gross loans in 2019 vs. 35 percent in 2018.”
Chapel Hill Denham banking analyst Aderonke Adesola said the Cost of Risk and NPL ratio could rise due to the impact of weaker oil prices on the cashflow of business in the oil and gas sector, although the analyst noted that exposure of FBNH is better than it used to be.
While the loans can be restructured to ease pressure given a weaker economy, analysts say Nigerian banks should see higher impairments charges and rise in NPLS.
According to Adesola, the “devaluation” of the Naira will likely translate to higher NPL for foreign currency-denominated loans of FBNH (46% of total loans book in 2019) when the bad loan is converted to Naira. The foreigncurrency loans mostly held by Oil & Gas businesses is expected to increase because of the higher exchange rate.
Apart from the Oil & Gas sector, sectors like power, manufacturing and trade are among those that could face a challenge in repaying their loans.
The border closure and significant slowdown in the economy are expected to the coronavirus pandemic are said to be downside risks for manufacturing and trade activities.
In 2016 FBNH saw Cost of Risk jump to 10.4 percent from 5.7 percent while NPL ratio hit 24.4 percent from 18.1 percent and impairment charges rose 90 percent due to the oil shock and exposure to vulnerable sectors.
Industry outlook
The prognosis for Nigerian lenders is in line with the outlook by international credit rating agency which has in the last few weeks moved to downgrade the country’s rating ahead of an expected slowdown in earnings and growth because of COVID-19.
Fitch Ratings late March downgraded the three-highest rated banks in Nigeria to Long-term Issuer Default Rating (IDR) ‘B’ and Viability Rating (VR) ‘b’, and placed National Ratings of 10 rated Nigerian banks on Rating Watch Negative (RWN).
“… all Nigerian banks will face material pressures from a weaker operating environment over the next few months given the oil price crash, a potential further devaluation of the Nigerian naira and the impact of the COVID-19 pandemic on individuals and businesses,” Fitch said.
Fitch’s credit-worthiness revision on bank came a week after Moody’s told Bloomberg that a weaker naira would put negative pressure on Nigerian banks’ asset quality and capital metrics as they have a high proportion of foreign currency-denominated loans.
However, Moody’s noted that Nigerian banks hold good capital buffers, a position shared by CSL analyst Gbolahan Ologurno.
According to Ologurno, lenders have since 2017 increased their risk assessment framework, while some have restructured their loan books and taken additional measures to ensure their obligors have a hedge contract as protective measures.
But Fitch draws lessons from the 2015/2016 oil price crash which saw banks’ bad loan spike and expects the current oil price shock to adversely impact the oil and gas sector, which accounts for around 30% of the banking sector’ gross loans.
Fitch said its stress tests show that asset-quality risks arising from deterioration of the banks’ oil and gas exposures are the biggest threat to their ratings.
Additionally, it expects the nonoil segment to be impacted by the slower economy, but also due to the COVID-19 crisis, which could severely affect communities and industries, Fitch said. “It would particularly test the quality of consumer and SME loans.”
Last year the Central Bank of Nigeria (CBN) forced banks to lend as much as 65% of their deposits as loans but prioritized the SMES sector.
In the light of the COVID-19 outbreak and oil price decline, the CBN introduced regulatory forbearance to consider temporary and time-limited restructuring of loan terms and tenors to households and businesses affected by COVID-19.
Non-performing Loans (NPLS) ratio of banks fell from 6.59 percent in January to 6.54 percent in February 2020, still above the prudential benchmark of 5.0 percent of the CBN.
Financials snapshot
Gross earnings of FBNH grew 6.7 percent year-on-year to N627bn. Non-interest income grew 20.3 percent to N179.5bn while interest income increased by 1.7 percent to N290bn amid a challenging interest environment.
Profit before tax jumped 30.9 percent while a tax increase of 76.5 percent moderated profit after tax growth to 26.5 percent.
Earnings per share at the end of the year rose to N2.05 from N1.62 in 2018, while dividend yield jumped to 9.5 percent from 6.3 percent in the previous year.
The lender’s shares rose 6.82 percent to close at N4.7 per share on Friday.
COVID-19 response
FBNH has activated a robust Business Continuity Plan to ensure minimal disruptions to operations. The focus is to support the country, ensure the safety, health and well-being of our employees while providing essential services for our customers in a safe environment through alternative channels, it said.
FBNH is also a member of the COVID-19 coalition that provides support for the government in expanding health facilities for testing, isolation and treatment and has provided an educational intervention scheme for 1 million children affected by the pandemic.
According to FBNH, its distinctive network in digital and Agent banking positions the Group as the most reliable distribution channel for government and NGO COVID-19 support programs with 53,000 agents including a good number of branches that will remain in operation during the pandemic.
About FBN Holdings
FBN Holdings PLC provides commercial banking activities. The Company offers merchant, investment banking, trusteeship, fund management, registrars, and advisory services through its subsidiaries. FBN also sells insurance policies and mortgages via subsidiary companies.
