Fitch Places FCMB on 'Watch' over Pressure on Capital

Fitch Places FCMB on ‘Watch’ over Pressure on Capital

Fitch Ratings has placed First City Monument Bank Limited’s (FCMB) Long- and Short-Term Issuer Default Ratings (IDRs), Viability Rating (VR), and National Ratings on Rating Watch Negative (RWN) following the sharp devaluation of the Nigerian naira.

According to the report, 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. The group raised money in the debt market this year.

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

Fitch expects to resolve the RWN 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.

The official exchange rate, namely the Investors and Exporters (I&E) window, depreciated sharply on 14 June following the Central Bank of Nigeria’s (CBN) decision to unify its multiple exchange-rate windows and allow the naira to trade at a market-determined rate.

The I&E window closed at 776/USD on 21 June, representing a 62% depreciation since 13 June and 70% depreciation since 2022.

The move away from a longstanding managed exchange rate regime is intended to restore capital inflows and reduce foreign-currency (FC) shortages that have plagued the Nigerian economy in recent years. This major policy change came just days after the suspension of the CBN governor by recently-elected President Tinubu.

President Tinubu has implemented key reforms faster than Fitch expected, including removing fuel subsidies, within weeks of his inauguration. These reforms are positive for the sovereign’s credit profile but pose near-term macroeconomic challenges.

A large proportion of economic activity was already influenced by the parallel market exchange rate, which has traded over 700 naira to the US dollar for most of the past year, reducing the inflationary impact of the recent devaluation of the official exchange rate.

However, the devaluation and fuel subsidy removal will add to existing inflationary pressures, including the price of fuel, and increase risks of social unrest. 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.

Foreign currency lending standards have tightened in recent years, influenced by a CBN directive prohibiting FC loans to borrowers without FC revenues and some banks restructuring FC loans to naira.

Some legacy FC loans to borrowers without FC revenues remain and such loans are expected to weaken in the near term. However, our assessment of asset quality takes also into account the banks’ small loan books as they hold large cash reserves at the CBN and sovereign fixed-income securities holdings.

The devaluation will lead to the inflation of banks’ FC-denominated risk-weighted assets (RWAs) in naira terms and exert downward pressure on capital ratios.

Fitch believes the direct impact of the recent devaluation on capital ratios will be manageable for the banks we have affirmed due to their small FC-denominated RWAs and long net FC positions, which will lead to revaluation gains and help to cushion the impact of inflated RWAs on capital ratios.

“We expect these banks will maintain sufficient capital buffers and pre-impairment operating profits to accommodate the second-order economic effects of the devaluation on loan quality and increased risks to capital from inflated FC-denominated problem loans”.

Notwithstanding its small FC-denominated RWAs and long net FC position, Fitch 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.

FCMB has high Stage 2 loans (end-2022: 22% of gross loans, largely FC-denominated) that will be inflated by devaluation and may lead to greater prudential provisions and exert further pressure on CAR while increasing risks to core capital.

Fitch views its pre-impairment operating profit as providing only a moderate buffer to accommodate this and other loan-quality risks. #Fitch Places FCMB on ‘Watch’ over Pressure on Capital Nigerian Treasury Bills Yield Rises to 7%