FCMB: Tight Capital, Balance Sheet Dollarisation Pose Risks to Earnings
Despite a higher risk appetite, FCMB Plc remains less profitable compared with its peers in the Nigerian banking sector, according to Fitch Ratings, which also noted that lender controls a 4% share of the Nigerian banking assets.
At 15.4%, FCMB’s capital adequacy ratio is knitted closely with the 15% benchmark required by the industry’s regulator at the time when banks are faced with cash reserve ratio debits for failing to meet the CBN 65% loan to deposit demand. READ: FCMB: CBN Debits Put Pressure on Lender’s Earnings Outlook
In its rating note, Fitch pointed at balance sheet dollarisation and high loan contraction among other risks facing the bank’s performance in the year apart from a low capital buffer. MarketForces Africa’s attempts to obtain insight from FCMB’s corporate communication team ended unyielding after several emails asking if there is a plan to raise funding to shore up the capital position.
On the Nigerian Exchange, FCMB’s 19.802 billion shares outstanding was valued at N60 billion on Thursday as the bank share price steadied at N3.03 for the second trading day in the week.
Three key shareholders in FCMB own 25% of the outstanding shares in the financial boutique at the end of the financial year 2021. The breakdown of its largest shareholders shows that Stanbic IBTC Nominees own 10.63% (Down from 11.61%), Capital IRG Trustees Limited owns 9.32% (up from 8.83%) and Primrose Investment Limited 5.12% (up from 3.25%).
According to industry sources, FCMB is a finance partner to Primrose Investment, a private limited liability co-founded by Jide Balogun – one of the sons of FCMB founder Otunba Michael Subomi Balogun.
While FCMB is driving earnings momentum with an increased footprint in digital banking business, and diversified business units, its exposure to dollar liabilities cast risks on the group balance sheet apart from heavy loan concentrations.
However, there is an indication that the bank’s net interest margin will increase following the Central Bank of Nigeria’s monetary policy tightening to fight the worsening inflation rate. At 17.71% in May, Fitch sees Nigeria’s headline inflation as a downside risk to lenders’ performance.
Some analysts are projecting a better outing on net interest margin and interest income from government securities in the year following a 150 basis point increase in benchmark interest rate which has spurred yield repricing in the fixed income market.
In an effort to drive growth, the group cast its interest very much more in diversified portfolios, an ambition it has continued to nurture to reduce banking unit contribution to the group profitability. Recently, FCMB closed the acquisition of AIICO Pension Limited as part of the move to actualise the drive.
In an equity report, analysts at Meristem Securities said they expect the consolidation of the pension company to support topline performance at a relatively low marginal cost, thereby increasing the bank’s earnings. As a result, analysts projected the bank’s gross earnings to rise to N233.60 billion in the financial year 2022 while profit is expected to print at N27.33 billion.
The tier-2 lender controls a 4% market share of the Nigerian banking assets, with a modest capital buffer, and ample local currency while its said management invests excess liquidity in government securities.
In the first quarter, FCMB delivered an impressive topline growth of 33.91% year on year to N58.31 billion – level analysts said was the highest in five years. The feat was driven by an uptick in interest and non-interest revenue in the period.
The rating note indicates that FCMB’s risk appetite remains high due to the bank’s focus on smaller corporates and small and medium enterprises – SMEs.
Fitch believes that SMEs customers are more vulnerable to the operating environment due to generally weaker balance sheets and an inability to access funding during periods of market uncertainty.
“The bank’s small franchise constrains its ability to diversify lending, while the bank’s loan concentrations remain high both by sector and single obligor”, the rating note stated.
FCMB’s franchise is moderate, according to the rating note, with a 4% market share of total banking system assets, resulting in limited pricing power compared with larger banks, and driving the focus on higher-margin segments such as mid-sized corporates, retail and SME borrowers.
The report said the bank asset quality has been accessed as adequate for the Nigerian market, though exposure to foreign currency remains a downside risk to overall performance. Its cost-to-income ratio has also worsened due to funding pressures.
FCMB’s impaired loans ratio has remained broadly stable over the last two years, Fitch said in the rating note, adding that the bank’s Stage 3 loan ratio deteriorated slightly to 4.1% at the end of the financial year 2021.
In 2020, FCMB stage 3 loan ratio had printed at 3%. The increase, according to the rating note was due to new problem loans feeding through from Stage 2 in 2021 against stronger loan growth and write-offs.
FCMB’s stock of Stage 2 loans at 21% is large and mostly restructured, Fitch said, casting doubt on asset quality outlook amidst Nigeria’s nasty macroeconomic direction and pre-election uncertainties.
The bank’s total restructured book accounts for 25% of total loans, which was slightly above the sector average, according to Fitch. However, it said reserves coverage of Stage 3 loans is sound at 107% at the end of 2021 but reserves against Stage 2 loans remain fairly low.
On profitability, the rating note revealed that FCMB’s profitability metrics typically lag behind those of small bank peers despite the bank’s reasonable net interest margin. Its annualised operating profit as a proportion of risk-weighted assets of 1.1% in the financial year 2021, according to the rating note which noted that loan impairment charges consumed 38% of pre-impairment profit in the same year.
Fitch posits that FCMB’s cost-to-income was high at 78% in 2021, compared with a market average of 60%, a resultant effect of higher inflation pressures in the Nigerian market. FCMB’s regulatory capital adequacy ratio (CAR) printed at 15.4% at the end of the financial year 2021 was just above its minimum requirement of 15%. This is expected to limit the bank’s ability to create credit and earn income.
“We also expect capital buffers will remain thin due to rapid growth. Risks to capital also stem from high credit concentrations and balance-sheet dollarisation”, Fitch said. On funding profile, FCMB is largely funded by granular retail and SME deposits with 70% of total funding at end-2021, 72% in the form of current and saving accounts, according to the rating note.
It is noted that FCMB has some reliance on wholesale funding at 19% in 2021, which combined with a price-sensitive deposit base, leads to higher funding costs than large banking peers.
Fitch Ratings affirmed FCMB Limited’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a stable outlook and Viability Rating (VR) at ‘b- which captures the lender’s exposure to Nigeria’s volatile operating environment, a small franchise and high credit concentrations; balanced by improving funding and liquidity, moderate capitalisation and adequate asset quality for the rating.
It said FCMB has a fairly small loan book at 45% of total assets relatively and large non-loan assets comprising mainly Nigerian government securities. In September 2021 GCR Rating said in a note that capitalisation was negative to FCMB rating.
Capital adequacy ratio registered at 17.5% in the financial year 2020 from 17.2% in 2019, above the 15% regulatory requirement for its license category, albeit supported by tier 2 capital. However, GCR said its computed capital ratio is assessed to be within the low range of 15% and is forecast to remain at around 14.0% in 2021 through 2022.
“We positively considered the potential for capital support from the Group and take positive note of the bank’s sustained earnings retention”, GCR Rating stated. #FCMB: Tight Capital, Balance Sheet Dollarisation Pose Risks to Earnings