Sighting second-quarter results released by the parent company of First Bank of Nigeria, FBNH, financial analysis firm Moody's, observed that five defaulters are holding 35 percent of the commercial lender's non-performing loans.

Moodys has, however, given the bank’s aggressive drive towards reducing its bad debts a positive outlook.

In a breakdown seen by SaharaReporters, the credit rating agency warned of headwinds though.

The firm recalls that the holding company of First Bank, FBNH, reported in its second-quarter result that its non-performing loans had dropped from 25.3 percent to 14.5 percent as at March 2019.

Researchers at the firm believed that this would ease the relatively weak financial stability endured by the bank since the drop in crude oil prices which started at the tale-end of 2014.

“Improvements in the bank's NPL ratio will reduce a key weakness in its credit profile, namely its weaker solvency compared with peers. First Bank’s solvency is constrained by high asset risk and modest capital levels. The bank’s reported total capital adequacy ratio, including half-year profits, was 16.8% as of June, providing a moderate buffer above the minimum requirement of 15% and lower than most large Nigerian banks.

"Its low net profitability over the past four years has limited its capital growth via earnings retention. First Bank has been unable to retain much of what it makes because it has to make provisions for its bad loans which started soaring out of control in the second quarter of 2015," they said.

The ability of the lender to provide cover for some of its loans has seen the company reduce its debt portfolio by 49 percent since 2018.

Moodys noted that FBNH’s problem loans, although still high, have dropped by 49% since the end of 2018 to about NGN273 billion after the bank wrote off NGN127 billion worth of loans that were fully provisioned and recovered some of its NPLs.

The researchers said the trick had been to restructure the debt it has with the ‘five top defaulters’ for example.

“First Bank’s NPLs (and, therefore, FBNH's) are concentrated among a few borrowers, with the top five defaulters accounting for about 35% of the total, after writing off some of the large bad loans," they pointed out. "As a result, reaching workout agreements with just a few defaulters can significantly reduce the ratio.”

According to Moodys, the management of the long-standing bank is targeting an NPL ratio of lower than 10% by the end of 2019. The headwind, however, comes in the shape of the Central Bank of Nigeria’s directive that the minimum ratio of total loan to total deposit must be 60 percent from September.

Moodys noted that First Bank will need to grow its borrowing by 13 percent to meet the CBN’s directive, leading to a constraint on how much more debt it can provide ‘impairment charges’ for.

“The loan-to-deposit ratio for First Bank's Nigerian operations declined to 53% in June from 62% at the end of 2018, which would require the bank to grow its loans by about 13%, all else being equal, to meet the regulatory requirement of 60%, creating new credit risks in a challenging operating environment.

The bank's capacity to write off more NPLs will also be constrained by a relatively lower coverage at 65%, down from 78% at year-end 2018," it stated.

In essence, all First bank has achieved in the last year could be reversed from next month.

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