Overview

Credit risk arises when an obligor fails to perform its obligations under a trading or loan contract or when its ability to perform such obligations is impaired. It does not only arise when a borrower defaults on payment of a loan or settlement but also when its repayment capability declines (as reflected in a rating downgrade).

Credit risk arises from activities both on and off the balance sheet such as trade finance and acceptances, inter-bank transactions, foreign exchange, swaps, bonds, equities, options, commitments and guarantees, and settlement transactions.

In designing credit policies, due consideration is given to the Bank's commitment to:

1. Create, monitor and manage credit risk in a manner that complies with all applicable laws and regulations;
2. Identify credit risk in each investment, loan or other activity of the Bank;
3. Utilise appropriate, accurate and timely tools to measure credit risk;
4. Set acceptable risk parameters;
5. Maintain acceptable levels of credit risk for existing individual credit exposures;
6. Maintain acceptable levels of overall credit risk for the Bank's portfolio; and
7. Coordinate credit risk management and other risks inherent in the Bank's business activities.

Authority and Responsibility

Final authority and responsibility for all activities that expose the Bank to credit risk rests with the Board of Directors. The Board, however, may delegate this authority to the Board Credit Committee, the Executive Committee (Credit), the Chief Risk Officer or other officers with credit risk management responsibilities.

Credit Risk Management Philosophy

The following principles guide credit risk management across the Bank. The Bank shall:

1. Deliberately manage its risk asset portfolio to ensure that the risk of excessive concentration to any industry, sector or individual customer is minimised, as well as ensure portfolio flexibility and liquidity;
2. Ensure that exposures to any industry or customer are determined by the regulatory guidelines, clearly defined internal policies, debt service capability and balance sheet management guidelines;
3. Extend credit to only suitable and well-identified customers and never where there is any doubt as to their ethical standards and record;
4. Never extend credit where the source of repayment is unknown or speculative nor where the purpose/destination of funds is undisclosed;
5. Never take a credit risk where ability of customer to meet obligations is based on the most optimistic forecast of events. Risk considerations shall have priority over business and profit considerations;
6. Ensure that the primary source of repayment for each credit is from an identifiable cash flow from the counterparty's normal business operations or other financial arrangements. The realisation of security remains a fall back option;
7. Adopt a pricing model that reflects variation in the risk profile of various exposures to ensure that higher risks are compensated by higher returns;
8. Ensure that products to be sold in the retail market are backed by approved product programmes;
9. Ensure that the quantum of exposure and quality and value of collateral required are determined based on the risk profile of the counterparty;
10. Avoid all conflict of interest situations and report all insider-related credits to appropriate bodies; and
11. Ensure that there are consequences for non-compliance with the Bank's credit policies.

Responsibilities and Functions of Key Stakeholders in the Credit Process

1. Board of Directors (See Role of the Board of Directors)
2. Board Credit Committee (BCC) (See Board Credit Committee)
3. Executive Committee (See Executive Committee (EXCO) and Executive Management Committee for Credit Risk (EXCO Credit))

Credit risk in FirstBank is managed by three departments, namely:

• Credit Risk Management (CRM)
• Credit Analysis & Processing (CAP)
• Classified Assets Management (CAM)

Each department is headed by an officer of the rank of Assistant General Manager or Deputy General Manager.

Credit Risk Management (CRM) is responsible for the planning of the credit portfolio, the monitoring of loans on an obligor and portfolio basis as well as the reporting of these to Management and the Board. It is also responsible for controlling and ensuring that conditions set out for obligors are met before disbursement of funds. CRM has ownership of all rating systems/scorecards and recommends and monitors the credit risk appetite for the year and reports periodically to the Board and the Management. CRM also manages the Retail Collections Unit responsible for calling retail customers with past due obligation of one to 59 days to correct irregularities detected on these category of accounts.

Credit Analysis & Processing (CAP) is responsible for the appraisal of credit requests and processing through to final decision.

Classified Assets Management (CAM) is responsible for the recovery of classified loans that are 360 days past due and the provision of necessary support to branch recovery teams on other accounts.

The above structure ensures the separation of policy, monitoring, reporting and control functions from credit processing functions, thus ensuring broad credit governance.

Provisioning Policy and Credit Performance (Limits)

Classification	Past Due Obligation	Provision
Performing	<1 day – 89 days	1%
Substandard	>90 days – 179 days	10%
Doubtful	>180 days – 359 days	50%
Lost	>360 days	100%

Non-performing exposures are defined as exposures with past due obligations >90 days. Loans move from performing status to substandard, doubtful and lost category, depending on number of days past due. This is explained above.

Asset Quality Ratios

The decline in asset quality is as a result of the deterioration in margin trading facilities and loans secured by quoted shares. Non-performing accounts have been recognised, classified and provisions made as appropriate in line with the prudent guidelines (see chart).

Show data table

 

Portfolio Distribution by Business Lines

The Bank consistently pursued its retail banking strategy, increasing the contribution of consumer and retail from 33% of total loans in 2008 to 50% in the current year.

Business Lines	March 2009 N’bn	% of Portfolio
Total	717	100%
Corporates	355	50%
Consumer	113	15%
Retail Business	249	35%

Portfolio Distribution by Sector

Sector / Industry	Exposure N’mn	% of Portfolio
Total	717,187	100%
Agriculture	7,110	1%
Oil & Gas	146,744	20%
Manufacturing (Processed)	62,839	9%
Manufacturing (Allied Products)	38,436	5%
Manufacturing (Others)	22,072	3%
Construction	6,044	1%
Real Estate	71,234	10%
Utilities	5,081	1%
General Commerce	59,821	8%
Transport	8,275	1%
Communication	53,154	7%
Finance & Insurance	66,204	9%
Consumer	82,998	12%
Retail Services	86,781	12%
Public Sector	394	0%

Top 20 Obligors: Distribution by Industry and Industry Rating

Industry	Industry Rating	Exposure N'bn	% of LAD
Sub Total		242	33.75
Others		475	66.25
Total		717	100.0
Oil & Gas Services	B	58	8.09
Conglomerate	A	24	3.35
Telecommunications	BBB	18	2.50
Telecommunications	B	16	2.23
Logistics	B	12	1.67
Commercial Residential	B	11	1.53
Asset Management	BBB	11	1.53
Manufacturing Cement	A	10	1.39
Oil & Gas Marketing	BBB	9	1.26
Owner Occupier	B	8	1.12
Telecommunications	A	8	1.12
Asset Management	C	8	1.12
Manufacturing – Beverages	CC	8	1.12
Oil & Gas Marketing	CCC	7	0.98
Telecommunications	BBB	6	0.84
General Commerce – Chemicals & Allied Products	B	6	0.84
Manufacturing – Flour	BB	6	0.84
Oil & Gas Marketing	B	6	0.84
Commercial Non-Residential	B	5	0.70
Oil & Gas Services	BB	5	0.70

Margin Trading Facilities/Loans Secured by Shares

1. Exposure secured by shares (quoted and unquoted) stood at N58 billion, which represents 7.8% of Total Loan Portfolio (TLP). However, exposure against quoted shares was N42 billion and accounts for 5.7% of Total Loan portfolio. These positions are within the approved portfolio limit of 10%.
2. 30% of total exposure is secured by an unquoted stock. FirstBank exceptionally accepted the unquoted shares of a large telecommunications company as partial security for loans to investors in its private placement. Although the stock is not listed, liquidity risk is fair in over the counter (OTC) trading. All such facilities also have additional margin collateral of at least 30% in cash or quoted shares and have not been affected by the drastic drop in prices of shares quoted on the Nigerian Stock Exchange.
3. As a result of significant depression in prices of quoted stock in the year, total value of shares held as collateral on the portfolio was 80% of total exposure.
4. The Bank remedial strategy on the portfolio secured by quoted shares is to recover past due obligations on non-performing accounts before restructuring, restructure other exposures against realistic cashflows, obtain alternative/additional collateral and pursue gradual work-out. Other measures include obtaining increased collateral coverage of exposure to a minimum of 150% and an outright freeze on capital market lending.
5. Non-performing accounts have been classified in accordance with the Prudential Guidelines.

Credit Risk Management Outlook

The current global economic crisis has manifested in systemic financial risk, typically accompanied by a sharp decline in asset values/quality, economic activity, abrupt loss of liquidity, extreme volatility and instability throughout the financial system as a whole. The Bank's strategy is to ensure that target growth in loans and advances is conservative and attained without compromising asset quality. This is to be achieved through strategic risk planning, supported by sound risk identification, measurement, control, monitoring and reporting.

The risk appetite definitions have been reviewed to reflect market conditions and economic realities to enable the Bank to remain a sound institution. More emphasis will be placed on validation and independent review of models that are adopted by the Bank, starting with the risk rating and scoring model. Stress tests will be adopted as appropriate as they provide a valuable perspective on risks falling outside the normal scope and force one to step back from daily concerns to think through the implications of scenarios that may seem relatively unlikely but could pose serious risks to the institution if they materialised. FirstBank has taken a good initiative by acquiring the SAS risk management module and business analytics. This application will be available to develop models, test and validate different business scenarios.

Financial and credit analytical skills will also be strengthened through both internal and external training geared towards acquiring the expertise for analysing and managing risks posed by complicated transactions.