Fitch Keeps FCMB on Rating Watch Negative Again

Fitch Ratings said it has again kept First City Monument Bank’s (FCMB) credit rating under rating watch negative (RWN) following the Nigerian naira devaluation. According to the report, a decision to maintain FCMB  on rating watch negative reflects its view that, while estimated to have remained compliant with its 15% capital adequacy requirement, the bank is at risk of breaching the regulatory benchmark.

The global rating firm explained that this is due to further capital pressure emanating from further naira depreciation and credit losses considering already high Stage 2 and Stage 3 loans which printed at 31% in Q3-2023.

The Nigerian naira was recently devalued sharply from 899 per US dollar at the end of 2023 to 1,516 as of February 13, according to the rating note. Fitch said the rate of decline exceeded its expectations of a more moderate depreciation in 2024.

It said the large devaluation is the second within a year, which translates to a 70% devaluation since 2022 and has converged the official exchange rate with the parallel market rate.

The continued move away from a longstanding managed exchange rate regime is conducive to restoring capital inflows and reducing foreign-currency (FC) shortages that have weighed on economic activity in recent years.

However, it creates short-term macroeconomic risks, such as accentuating already-high inflation – which settled at 29% year on year in Dec 2023- that may weigh on economic growth, heightening loan quality and capital pressures already facing the banking sector.

Fitch now expects the banking sector’s impaired loans or Stage 3 loans ratio to increase at a faster pace than before the devaluation, which itself has caused already material foreign currency denominated problem loans to have inflated relative to gross loans and core capital and accentuated credit concentration risks.

The rating firm said, however, that asset-quality risks are mitigated by the small size of banks’ loan books and most foreign currency loans having been extended to borrowers with foreign currency receivables. Court Orders FCMB to Deposit N540m Defamation Damage Awarded to Prophet Omale

Furthermore, pre-impairment operating profit, which we expect to benefit from rising interest rates, generally provides a sufficient buffer to absorb loan impairment charges without affecting capital. #Fitch Keeps FCMB on Rating Watch Negative Again

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