GCR Places FCMB on Negative Watch as Loan Quality Declines

GCR Places FCMB on Negative Watch as Loan Quality Declines

The emerging market dominated rating agency, GCR Ratings, has affirmed FCMB Group Plc’s national scale long and short-term issuer ratings of BBB+ (NG) and A2 (NG) respectively, according to its latest release rating note. However, the outlook on the bank has been downgraded to negative watch from stable.  

In June, Fitch Ratings also put the financial services company on rating watch negative as a result of pressures on the bank capital following the Central Bank of Nigeria’s decision to float the local currency, the naira.

In less than three months, major ratings firms have sent signals that FCMB loans and capital are greatly exposed to macroeconomic challenges. Naira devaluation in June was a rude shock to Nigerian banks and other corporates as the suspended governor to the apex bank had maintained no devaluation stance.

Due to the large devaluation, analysts have predicted that FCMB could breach its 15% minimum capital adequacy requirement (CAR) given its material loan book dollarisation relative to capital headroom. It stage 2 loan remains heavy relative to the size of the loan book.

With buckets of foreign currency denominated loans threatening its asset quality, FCMB raised about N20.686 billion earlier in the year via subordinated bond sales to shore up its weak capital position in March 2023. Read more here

In the rating note, GCR said it affirmed FCMB’s series 1 N20.7 billion additional Tier 1 subordinated bonds rating of BBB-(NG). However, the agency revised the outlook to ‘Rating Watch Negative’ from stable.

It said rating watch negative reflects the assigned outlook to FCMB Group Plc’s core operating entity, First City Monument Bank Limited, reflecting considerable deterioration in the bank’s risk position which has been exacerbated by the adverse impact of the naira devaluation and macroeconomic challenges.

GCR said FCMB ratings balance a good competitive position, stable funding structure and adequate liquidity against a low to intermediate capitalisation assessment supported by an expected additional tier 1 (AT1) capital issuance over the short term.

It said FCMB Group Plc’s rating is one-notch lower than the theoretical consolidated group, due to the subsisting structural subordination.

GCR said this reflects the Non-Operating Holding Company’s (NOHC) reliance on cash flows and dividends from the bank and other subsidiaries, which could be diverted by regulatory intervention at a time of stress.

The group has seven direct subsidiaries and four indirect subsidiaries as of December 2022, with a growing franchise across different financial services areas including its banking subsidiary, consumer finance, investment management and investment banking, the rating note said.

FCMB series 1 perpetual, non-cumulative, fixed-rate, resettable, additional tier 1 subordinated Bonds is the first series to be issued under the Group’s N300 billion Debt Issuance Programme, according to GCR,

In February 2023, the Issuer raised N20.7 billion through the Series 1 AT1 Bonds, at a resettable fixed coupon rate of 16%, with no scheduled maturity date.

GCR said the series 1 AT1 Bonds qualify as AT1 capital for FCMB under the approval of the regulator, Central Bank of Nigeria (CBN) and will constitute direct, unsecured, and subordinated obligations of the bank. FCMB’s first coupon on the Series 1 AT1 Bonds was paid timely on 16 August 2023 with no breach of financial covenants, according to the rating note.

“The rating watch negative reflects our expectations that the weak quality of the bank’s loan book is likely to be further exacerbated by the macroeconomic challenges, with probable credit migrations to stage 3 classification and credit loss ratio registered above 3% over the next 12-18 months”, GCR said.

It however added that FCMB funding and liquidity position is expected to remain stable, predicated on the good deposit mobilisation capacity and other funding options. #GCR Places FCMB on Negative Watch as Loan Quality Declines