FCMB Gains 30% Amidst Balance Sheet Dollarisation Concern

FCMB Gains 30% Amidst Balance Sheet Dollarisation Concern

With a significant jump in year-to-date return, FCMB Plc shares were popular among value hunters in the equities segment of the Nigerian Exchange (NGX) in the past seven trading sessions despite negative ratings.

Its material foreign currency denominated loan was identified as a downside risk to capital ratio, according to Fitch Ratings note.

Ignoring the bank’s balance sheet dollarisation risks, investors bet large with unusual trade volume that pushed the company’s share price up by more than 30% in the last seven days.

The spike was also supported by improved market sentiment in the Nigerian bourse amidst an expectation of improved financial sector regulation. 

A sizeable part of the bank’s loans deteriorated in 2022, and they are foreign currency denominated lending with conversion risks, according to Fitch Ratings’ note reviewed.  Analysts have also projected a decline in capital ratios for tier-2 banks after the apex bank float the local currency.

Like other banks with similar exposure, FCMB will require higher provisions which would probably have negative effects on earnings as a result of this, analysts said. 

Fitch Ratings placed FCMB’s Long- and Short-Term Issuer Default Ratings, Viability Rating, and National Ratings on Rating Watch Negative (RWN), citing the devaluation of the naira.

The group had raised additional capital from the local debt capital market in the first quarter to shore up its position and boost its business profile. 

However, Fitch said the rating negative watch on FCMB reflects the risk of breaching its minimum total capital adequacy ratio (CAR) requirement due to the direct effect of the devaluation.

It also reflects increased risks to core capital from large foreign currency denominated problem loans that have been inflated by devaluation, which may necessitate greater prudential provisions and exert further pressure on CAR.

In its recent update, CardinalStone Partners said FCMB is among local lenders with a solid net foreign exchange position of about $208,000 – expecting the gain to lift the bank’s profit in the second quarter of the year.

In audited results for 2022, the group’s distributable profit inched higher by about 56% year on year to N32.91 billion from N20.916 billion in the corresponding year despite higher tax payment obligations in the period.

A well-diversified financial service group’s profit for the year printed above N32.59 billion, up 55.82% from N20.916 billion reported in the comparable period in 2021.

Its strong profitability was supported by an increase in gross earnings across business segments in the financial year 2022. According to its financial statement, gross revenues printed at N281.465 billion, up 32.89% from N212.012 billion in the comparable period.

In the rating note, Fitch plans to resolve the rating watch negative slam on FCMB within the next six months when exchange-rate volatility may recede, the impact on the CAR is clear, and the scale of the second-order economic effects on loan quality becomes evident.

Fitch expects impaired loan ratios to increase in the near term faster following the devaluation and fuel subsidy removal as borrowers contend with higher inflation and interest rates.

The devaluation will lead to the inflation of banks’ foreign currency denominated risk-weighted assets in naira terms and exert downward pressure on capital

Notwithstanding its small foreign currency denominated risk weighted assets and long net foreign currency position, Fitch Ratings said it believes the sheer scale of devaluation may lead to FCMB breaching its 15% minimum CAR requirement given its material loan book dollarisation relative to capital headroom.

It explained that FCMB has high stage 2 loans, which settled at 22% of gross loans in the financial year 2022 and were largely foreign currency denominated.

The sum is expected to be inflated as a result of the devaluation of the naira; and may lead to greater prudential provisions and exert further pressure on the capital adequacy ratio while increasing risks to core capital.

Fitch views FCMB’s pre-impairment operating profit as providing only a moderate buffer to accommodate this and other loan-quality risks. #FCMB Gains 30% Amidst Balance Sheet Dollarisation Concern UK Labour Productivity, House Price Slump