FCMB Value Ticks Amidst Cost, Earnings, Capital Concerns
With a plan to deliver N12 billion profit in the third quarter of the financial year 2023, FCMB Plc’s market valuation cruised near N100 billion on Friday, according to data from the Nigerian Exchange.
The bank share was rerated over improved sentiments in the local bourse driven by ongoing economic reform. Nigerian banks’ shareholders celebrated the suspension of Godwin Emefiele as the Central Bank of Nigeria governor with shares buying festival.
In its third quarter estimate submitted to the regulator, FCMB said its gross earnings would settle at N96.5 billion, the financial service group had low second-quarter earnings forecast after a cash crisis in the first quarter.
The financial service group’s valuation jump came amidst buckets of concerns raised by Fitch Ratings, including earnings underperformance, tight capital despite its recent borrowings, and steep costs to income metrics.
In a recent report, Fitch Ratings affirmed First City Monument Bank Limited’s long-term issuer default rating at ‘B-‘ with a stable outlook, keeping its viability rating (VR) at ‘b- ‘. Fitch has also affirmed the bank’s National Long-Term Rating at ‘BBB+(nga)’.
According to the rating note, FCMB’s viability rating reflects the bank’s exposure to Nigeria’s volatile operating environment, its small franchise, and high credit concentrations. This is balanced by the bank’s comfortable liquidity coverage and modest but acceptable capitalisation.
Fitch’s assessment of asset quality reflects high Stage 2 loans, although the loan book is fairly small, and large non-loan assets comprising mainly Nigerian government securities.
The rating note said Nigerian Banks continue to contend with US dollar shortages and the Central Bank of Nigeria’s (CBN) highly burdensome cash reserve requirement. FCMB, a mid-sized bank, controls a 4% market share of total banking system assets.
The moderate franchise results in limited pricing power compared with larger banks and drive the focus on higher-margin segments such as mid-sized corporates, retail, and SME borrowers, Fitch said in the rating note.
Fitch said FCMB’s risk appetite is high due to the bank’s focus and reliance on smaller corporates and SMEs. Apart from that, the bank has high sovereign exposure – the CBN cash reserves and government securities- equal to 650% of Fitch Core Capital (FCC).
The bank faced asset quality challenges as stage two loans remain high. FCMB’s impaired loans ratio improved to 3.7% in 2022 from 4.1% in the comparable year – with few new problem loans feeding through from Stage 2.
However, Stage 2 loans were a high 24% of gross loans in 2022, according to the rating note. Fitch said these loans are concentrated within oil and gas and largely US dollar-denominated, representing a risk to asset quality.
As a result of its concentration risk, Fitch forecasts the impaired loan ratio will increase moderately in the near term. At the same time, it noted that FCMB has weaker profitability than its rivals in the banking sector.
FCMB’s profitability metrics have been improving due to a higher net interest margin (6.5% in 2022) but typically lags those of small bank peers, Fitch stated. The bank reported an operating profit/risk-weighted assets (RWAs) ratio of 1.9% in 2022 compared with a 4% average for small peers.
The bank’s credit costs are noted to be high as loan impairment charges consumed nearly 40% of pre-impairment profit in the past three years. FCMB’s cost-to-income hit 71% in 2022, compared with a market average of 60%.
Keeping a tight nose, FCMB’s regulatory capital adequacy ratio settled at 16.0% in 2022, which was 100 basis points above its minimum requirement of 15%. Risks to capital also stem from high credit concentrations and from material naira depreciation, Fitch said in the rating note.
Given the bank’s smaller franchise, FCMB depends on wholesale funding (20% of total funding in 2022), which combined with a price-sensitive deposit base, leads to higher funding costs than at larger peers. #FCMB Value Ticks Amidst Cost, Earnings, Capital Concerns
