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Economy | Reviews & Outlooks

Fitch Affirms First City Monument Bank at ''B-'';Stable

Oct 05, 2021   •   by   •   Source: Proshare   •   eye-icon 832 views

Tuesday, October05, 2021 / 06:57 PM / by Fitch Ratings / Header Image Credit: First City Monument Bank

 

Fitch Ratings has affirmed First CityMonument Bank (FCMB) Limited's Long-Term Issuer Default Rating (IDR) at'B-' with a Stable Outlook. The National Long-Term Rating has been upgraded to'BBB+(nga)' from 'BBB(nga)', reflecting the bank's increased creditworthinessrelative to that of other issuers in Nigeria.


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Key Rating Drivers

IDRS and Viability Rating (VR)

 

The IDRs of FCMB are driven by its intrinsiccreditworthiness, as defined by its 'b-' VR. The VR reflects FCMB's exposure toNigeria's volatile operating environment, a small franchise and high creditconcentrations. This is balanced by the bank's adequate capitalisation andasset quality for the rating, the latter partly reflecting large non-loanassets comprising mainly Nigerian government securities (B/Stable), and cashplacements.

 

The Stable Outlook reflects Fitch's view that risks toFCMB's credit profile are captured by the current rating, with sufficientheadroom under our base case to absorb the fallout from operating-environmentpressures.

 

Operating conditions in Nigeria are graduallystabilising. Fitch forecasts 1.9% GDP growth in 2021, following a 1.8%contraction in 2020. Our baseline scenario is that business volumes andearnings should continue to rebound in 2021, while the rally in oil prices isalso a positive factor. Nevertheless, downside risks linger, given inherentlyvolatile market conditions, with banks still exposed to foreign currency (FC)shortages, potential further currency devaluation, rising inflation andregulatory intervention by the Central Bank of Nigeria (CBN).

 

FCMB's franchise is moderate (4% market share of totalbanking-system assets), resulting in limited pricing power compared with largerbanks, and driving the bank's focus on higher-margin segments such as mid-sizedcorporates, retail and SME borrowers.

 

FCMB's impaired loans (stage 3 IFRS 9) ratio hasimproved in recent years. It fell to 3% at end-1H21 (end-2019: 3.6%), dueprimarily to improved economic conditions, loan growth and write-offs. However,FCMB has a large stock of stage 2 loans (22%), which are mostly restructured.The total restructured book amounts to 25% of total loans, slightly above thesector average. Reserves coverage of non-performing loans (NPLs) is solid (179%at end-1H21), although reserves against Stage 2 loans are fairly low.

 

Credit concentrations are significant with the20-largest loans accounting for half of gross loans at end-1H21, or 2.2x Fitchcore capital (FCC), exposing FCMB to event risk. Its oil and gas exposure -mainly relating to the high-risk upstream segment - represented a high 30% ofloans.

 

Our asset-quality assessment also considerssubstantial non-loan assets - net loans comprised only 41% of total assets atend-1H21 - largely comprising investments in Nigerian government securities,and cash placements.

 

FCMB's profitability metrics typically lag behindthose of small bank peers, despite the bank's reasonable net interest margin(NIM). The bank reported an annualised operating profit/risk-weighted assets(RWA) ratio of 1% in 1H21. Loan impairment charges (LICs) consumed 34% ofpre-impairment profits in 1H21. FCMB's profitability is also affectednegatively by a high cost base with a cost-income ratio of 83% in 1H21, higherthan the peer average.

 

The bank's FCC ratio (15.2% at end-1H21) is in linewith small bank peers'. Capitalisation is a strength at current rating level, butshould be viewed against high credit concentration risks and balance-sheetdollarisation. At end-1H21, FCMB's capital adequacy ratio of 15.9% providedonly limited headroom above the minimum regulatory requirement of 15%.

 

FCMB is largely funded by granular retail and SMEdeposits (70% of total funding at end-1H21, 73% in the form of current andsaving accounts). Deposit growth has been rapid in recent years, driving areduction in the Fitch-calculated loans/customers deposits ratio to 70% atend-1H21 (a level still above peers') from 77% at end-2019. FCMB is morereliant on wholesale funding (26% of total funding at end-1H21) than peers -mostly comprising borrowings from development financial institutions,on-lending facilities and a local-currency bond programme.

 

Local-currency liquidity is ample, with excessliquidity placed in government securities. FCMB's funding in FC largelycomprises contractually short-term customer deposits, resulting in maturitymismatches, though behavioural data suggests that FC funding is fairly stable.FC liquidity largely relies on FC loan repayments but is also underpinned byaccess to committed lines.


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Support Rating andSupport Rating Floor

Sovereign support to banks cannot be relied on givenNigeria's weak ability to provide support, particularly in FC. The SupportRating Floor (SRF) of all Nigerian banks is 'No Floor' and all Support Ratings(SR) are '5'. This reflects our view that senior creditors cannot rely onreceiving full and timely extraordinary support from the Nigerian sovereign ifany of the banks become non-viable.

 

Rating Sensitivities

Factors that could, individually or collectively, leadto negative rating action/downgrade:

  • Erosion of capital buffers to levels close to or belowthe bank's minimum regulatory requirements, which could result from asignificant increase in impaired loans leading to losses.

 

Factors that could, individually or collectively, leadto positive rating action/upgrade:

  • An upgrade of the Long-Term IDR would require astrengthening of the bank's company profile, franchise and funding andliquidity position.

 

Other Debt and IssuerRatings: Key Rating Drivers

FCMB's National Ratings are driven by the bank'sstandalone strength. FCMB's National Short-Term Rating is the lower of twopossible options for a 'BBB+(nga)' National Long-Term Rating under Fitch'scriteria, reflecting weaknesses in the bank's funding and liquidity profile,which increase the vulnerability of default on its short-term local-currencyobligations within Nigeria.

 

Other Debt and IssuerRatings: Rating Sensitivities

Factors that could, individually or collectively, leadto negative rating action/downgrade:

 

National Rating

The National Ratings are sensitive to a negativechange in Fitch's view of the entity's creditworthiness relative to otherNigerian issuers'.

 

Factors that could, individually or collectively, leadto positive rating action/upgrade:

  • The National Ratings are sensitive to a positivechange in Fitch's view of the entity's creditworthiness relative to otherNigerian issuers'.

 

Best/Worst Case RatingScenario

International scale credit ratings of FinancialInstitutions and Covered Bond issuers have a best-case rating upgrade scenario(defined as the 99th percentile of rating transitions, measured in a positivedirection) of three notches over a three-year rating horizon; and a worst-caserating downgrade scenario (defined as the 99th percentile of ratingtransitions, measured in a negative direction) of four notches over threeyears. The complete span of best- and worst-case scenario credit ratings forall rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenariocredit ratings are based on historical performance.

 

ESG Considerations

Unless otherwise disclosed in this section, thehighest level of ESG credit relevance is a score of '3'. This means ESG issuesare credit-neutral or have only a minimal credit impact on the entity, eitherdue to their nature or the way in which they are being managed by the entity.


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Related News

  1. FCMB Emerge as the Best SME Bank in Africa and Nigeria
  2. FCMB Group Plc Reports N7.6bn PAT in Q2 2021 Results, (Share Price:N3.02k)
  3. FCMB Partners Mercy Corps to Uplift 500,000 Farmers and the Vulnerable in North-East Nigeria
  4. FCMB Collaborates with NESP to Host SME Seminar on Renewable Energy
  5. FCMB Recertified for Quality Management Standards
  6. FCMB Empowers Agribusiness, Healthcare and Others With AfDB's $50m Credit
  7. FCMB Limited Announces Appointment of Mrs. Oluwatoyin Olaiya as ED, Risk and Compliance
  8. FCMB Limited Announces Appointment of Mrs. Yemisi Edun as The New Managing Director
  9. FCMB Premium Banking to host Interactive Webinar on Real Estate Investment in Lagos
  10. Nigeria: AfDB Bolsters Women-empowered Businesses with $50m Loan to FCMB

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