Fitch Keeps FCMB on Rating Watch Over Capital, Asset Quality Pressures
Fitch Ratings has maintained First City Monument Bank Limited’s (FCMB) Issuer Default Ratings (IDRs), Viability Rating (VR) and National Ratings on Rating Watch Negative (RWN).
The maintained RWN reflects Fitch’s view that while FCMB stayed compliant with its minimum total capital adequacy ratio of 15.4% at the end of the third quarter of 2023. This is against the regulatory requirement of 15% which analysts think poses a risk of the bank breaching the benchmark.
The bank’s capital position came under pressure following the June devaluation. This considers that buffers over this requirement remain thin, given the risk of a further material devaluation of the naira.
The global rating agency noted that this reflects increased risks to capital from large foreign currency-denominated problem loans (Stage 2 + Stage 3 under IFRS 9) that are inflated by devaluation, which may necessitate additional provisions and exert further pressure on the capital adequacy ratio of the bank.
According to the rating note, Fitch expects the bank to resolve the RWN within the next six months when exchange-rate volatility has potentially receded, the impact on the capital adequacy ratio is clear and the second-order economic effects on loan quality become evident.
FCMB’s IDRs are driven by its standalone creditworthiness, as expressed by its VR of ‘b-‘, Fitch said. The rating note added that the bank’s viability rating reflects the concentration of its activities within Nigeria’s challenging economic environment, a moderate franchise, high credit concentrations and problem loans, moderate profitability, thin capital buffers over minimum regulatory requirements and sound liquidity coverage.
The recently elected president, Bola Tinubu, has pursued key reforms more quickly than Fitch expected, completely removing the fuel subsidy and causing the Nigerian naira to devalue within weeks of his inauguration.
These reforms are overall positive for the sovereign’s credit profile but pose near-term challenges, including adding to inflationary pressures and risks of social unrest. The sharp depreciation of the naira has put pressure on banks’ capital ratios.
FCMB, a mid-sized bank, representing about 4% of domestic banking system assets, and has limited pricing power compared with larger peers. The group revenue diversification is moderate with non-interest income representing 27% of operating income.
Fitch analysts noted that FCMB’s single-borrower credit concentration is high, with the 20-largest customer loans representing about 50% of gross loans. For the financial institution, foreign currency lending is material at 34% of net loans as of the end of the third quarter of 2023.
The rating note highlights that FCMB’s sovereign exposure through securities and Central Bank of Nigeria cash reserves is high relative to Fitch’s core capital at about 650% in 2022. Asset quality is under pressure, according to the rating note.
FCMB’s impaired loans or stage 3 loans under IFRS 9 ratio increased to 4.4% at the end of the third quarter of 2023 from 3.7% in 2022. Fitch hints that it expects problem loans to increase further in the near term.
Stage 2 loans, which are mainly foreign currency denominated to borrowers from the oil and gas industry increased to 27% of gross loans at end-3Q23 versus 22% in FY2022 as a result of the devaluation and represent a key risk to asset quality.
FCMB delivers moderate profitability, as indicated by operating returns on risk-weighted assets (RWAs) averaging 1.9% over the past four years, the rating note said. The bank’s profitability improved significantly in 9M-2023 as a result of large foreign-exchange revaluation gains stemming from the bank’s net long foreign currency position that accompanied the naira devaluation.
FCMB’s bank-solo CAR had a limited buffer (40bp) over the minimum requirement of 15% at the end of the third quarter of 2023, having declined due to the devaluation of the currency. The issuance of N26 billion AT1 capital-qualifying securities in 4Q-2023 has increased buffers but Fitch considers these to remain thin given the risk of a further material devaluation of the naira.
The rating note observed that the parallel market rate is currently trading at about 1,200/USD as against 770/USD official exchange rate at the end of the third quarter of the year.
FCMB is primarily funded by customer deposits, which comprise a large percentage of current and savings accounts. Depositor concentration is noted to be moderate, with the 20 largest representing 15% of the total at end-2022.
Also, the bank’s liquidity coverage in local and foreign currencies is sound, with liquid assets representing 30% of total assets at end-3Q23. #Fitch Keeps FCMB on Rating Watch Over Capital, Asset Quality Pressures Nigeria Eurobond Slumps after CBN Resumes OMO Auction