First Bank Needs New Strategy as it Lags Other Tier-one Banks

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First Bank

…reports lowest pre-tax profits, ROE, ROA in first quarter

First Bank of Nigeria is in danger of permanently lagging behind other tier-one lenders as it struggles with boardroom squabbles, elevated bad loans and poor returns, necessitating a need for a new strategy.

The oldest bank in Nigeria needs to trim bloated costs, attract more skilled younger talent who often view the bank as not being cool, and above all restore shaken confidence from its latest boardroom saga, according to various analysts MoneyCentral spoke to for this report.

“FBN Holdings, the parent company of First bank, has the third largest banking assets in Nigeria but has one of the lowest returns on assets and equity. It also has one of the highest cost base of any major bank and this has been going on for years. Frankly management has to come to terms with the fact that the numbers are just not good enough,” an investment banker who spoke to MoneyCentral on condition of anonymity said.

For the first Quarter (Q1), 2021 financial period, First Bank reported the lowest return on average equity (ROAE) among the five major tier-one lenders.

First Banks ROAE came in at 8.2 percent, compared to 19.2 percent for Zenith Bank, 20.53 percent for United Bank for Africa (UBA), 22.06 percent for Guaranty Trust Bank (GTB), and 27.22 percent for Access Bank, according to data compiled by MoneyCentral.

The return on equity (ROAE) metric reveals how effectively a corporation is generating profit from the money that investors have put into the business.

Return on Equity is calculated by dividing net income by total shareholders’ equity.

A higher return on equity indicates that a company is effectively using the contributions of equity investors to generate additional profits and return the profits to investors at an attractive level.

Investors have found that ROE is a much better metric at assessing the market value and growth of banks.

This comes as the capital base for banks is different from conventional companies, where bank deposits are federally insured by the NDIC.

As well, banks can offer interest on its deposits, which is a form of capital, that is well below rates other companies pay for capital, as such banks are incentivized to focus on managing capital to maximize shareholder value.

First Bank also reported the lowest return on assets in Q1, 2021 at 0.8 percent, compared with UBA’s return on assets which came in at 1.96 percent, Access Bank at 2.35 percent, Zenith Bank at 2.5 percent and Guaranty Trust Bank at 3.67 percent in the first quarter.

On an absolute pre-tax profits basis First Bank also reported the lowest among the five lenders, coming in at N18.90 billion, compared to UBA at N40.58 billion, GTBank at N45.55 billion, Access at N60.05 billion, and Zenith Bank at N61.02 billion.

Analysts tell MoneyCentral that a lot of the issues First Bank is facing relates to insider abuses at the bank which had been ongoing for some time.

Some insiders of First Bank of Nigeria who took loans in the bank with controlling interest on the board of Directors, failed to adhere to the terms of restructuring of their credit facilities, which has contributed to the poor financial state of the bank, according to Godwin Emefiele, Governor of the Central Bank of Nigeria (CBN) in a press briefing in April.

“The CBNs recent target examination as at December 31st 2020 revealed that insider loans were materially non-compliant with terms of restructure of the loans,” Emefiele said.

“For example non perfection on liens on shares and collateral arrangements that CBN had insisted on for over 3 years, despite several regulatory reminders. The bank has also not divested its non-permissible holdings in non-financial entities in line with regulatory directives.”

The CBN in a letter to the former Chairman of the Bank dated April 26th, 2021, said the bank had not complied with regulatory directives to divest its interest in HoneyWell Flour Mills despite several reminders.

The bank had also not perfected its lien on the shares of a Director Oba Otudeko, in FBN Holdco which collateralized the restructured credit facilities for HoneyWell Flour Mills contrary to conditions precedent for the restructuring of the company’s credit facility.

The bank had also failed to divest its equity investments from its holdings in Bharti Airtel Nigeria in line with extant regulations, Emefiele said.

“Governance issues are rearing their head again,” said Renaissance Capital in an April 29 note titled ‘FBN Holdings, Management changes, CBN concerns et al.’

“Filtering through all the information, our sense is that the CBN has strong views against…Oba Otudeko. This does not come as a surprise as he was chairman all through the tenure of the former CEO, Bisi Onasanya, under whom significant governance failures occurred that led to Non-Performing Loans (NPLs) reaching 25% and a multiyear clean-up process which led to market share losses and regulatory forbearances.”

First Bank of Nigeria has been under regulatory forbearance since 2016 to date according to Emefiele.

Forbearance is a regulatory policy implemented by central banks and other regulatory authorities, that permits banks and financial institutions to continue operating even when their capital is fully depleted.

“The problems at the bank were attributed to bad credit decisions, significant and non-performing insider loans, and poor corporate Governance practices,” Emefiele said.

The manifestation of these bad credit decisions by the bank has been a much higher level of loan impairment charges and NPL levels compared to other tier one lenders.

First Bank’s loan impairment charges came in at N13.2 billion in Q1, 2021, compared to N12.54 billion for Access Bank, N3,86 billion for Zenith Bank, N2.03 billion for UBA, and N1.86 billion for GTBank.

Meanwhile its non-performing loans (NPL) ratio stood at 7.9 percent in Q1, 2020, compared to 4 percent for Access and N4.2 percent for Zenith Bank (the lower the NPL ratio the better).

First Bank also has one of the highest cost base for major banks with its cost-to-income ratio at an elevated 69.6 percent in the first quarter of 2021. This compares to 60.44 percent for UBA, 55.76 percent for Access Bank, 53.2 percent for Zenith Bank and 42.56 percent for Guaranty Trust Bank.

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