CBN-Directed Board Changes At First Bank Of Nigeria And FBN Holdings Plc Address Governance Issues

S&P Global Ratings said that changes to the boards of First Bank of Nigeria Ltd. (FBN; B-/Stable/B) and FBN Holdings PLC (FBNH; B-/Stable/B), directed by Central Bank of Nigeria (CBN), address the banking group’s corporate governance challenges and ensure the Nigerian banking sector’s financial stability. Our ratings on FBN and other Nigerian banks remain constrained by shortcomings in corporate governance and transparency, among other factors.

The CBN has replaced the entire boards of FBN and FBNH, and reinstated the former executive directors and CEO Dr. Adesola Adeduntan. The CBN also requested FBN unwind certain exposures and divest from its participation in a non-permissible company, also pointing to potential corporate governance lapses at the bank. However, Dr. Adeduntan’s reinstatement and the re-appointment of the other executive directors underscores the CBN’s confidence in the existing management team to continue the turnaround of the third-largest banking group in Nigeria, which has total assets of Nigerian naira 7.7 trillion. T

The CBN’s actions are particularly notable considering the regulator views FBN as a systemically important financial institution. We are of the view that the CBN’s historical approach has been more reactive than proactive, as illustrated by the Skye Bank episode. That said, recent actions, while disruptive in the near-term, may signal a more direct and possibly decisive supervisory approach to alleged failings in the management and governance of regulated institutions.

FBN’s overall credit profile has gradually stabilized since 2016, with a capital adequacy ratio of 17% in 2020 against a 15% minimum requirement. Similarly, the bank’s asset quality indicators improved significantly, with nonperforming loans (NPLs) reducing to 7.7% in 2020 from 20%-25% since 2016. We expect NPLs will average at about 9% over the next 12-18 months to reflect the risks that a portion of restructured and performing loans might come under pressure due to the weak macroeconomic environment in Nigeria. The bank’s liquidity remains sound, with its regulatory liquidity ratio above 34%.

– Proshare