Reviews & Outlooks | |
Reviews & Outlooks | |
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Tuesday, October 06, 2020 / 3:36 PM /by Fitch Ratings / Header Image Credit: FCMB
Fitch Ratings has affirmed First City
Monument Bank (FCMB) Ltd's ratings, including the bank's Long-Term Issuer
Default Rating (IDR) at 'B-', and removed them from Rating Watch Negative
(RWN). The Outlook is Stable.
The removal of the RWN on FCMB's
Long-Term IDRs, Viability Rating (VR) and National Ratings reflects Fitch's view
of receding near-term risks to the bank's credit fundamentals from the economic
fallout arising from the oil price slump and coronavirus pandemic.
In our opinion, the impact of the economic downturn on
FCMB's
credit profile is tolerable at the current rating level and it will take
several quarters before the full extent of the crisis on corporates and
households is seen in its financial metrics. Since the previous rating action
in March, regulatory forbearance on asset classification and banks' own
debt-relief measures have significantly eased the sector's asset-quality
pressures. Debt-relief measures are, nevertheless, temporary and with the
eventual easing of fiscal and monetary support from the Central Bank of Nigeria
(CBN), we see a material risk that bank asset quality could deteriorate faster,
unless economic recovery gathers pace.
The Stable Outlook on FCMB's
Long-Term IDR reflects our view that the bank's rating has sufficient headroom
at this level to absorb moderate shocks from sustained downside risks to the
operating environment, the heightened level of risk in doing banking business
and resulting risks to its financial performance over the next 12-18 months.
Key Rating Drivers
IDRS and VR
The IDRs of FCMB are driven by its intrinsic
creditworthiness, as defined by its 'b-' VR. The VR considers FCMB's exposure
to Nigeria's volatile operating environment, but also the bank's moderate
profitability compared with peers' and limited capital buffers above minimum
regulatory requirements. The credit quality of FCMB's loan book (40% of assets
at end-1H20) has remained reasonable so far. Our assessment also considers the
bank's sizeable investments, mainly in Nigerian government securities, and cash
placements. The Nigerian sovereign rating is 'B' and Outlook is Stable.
FCMB's franchise is small as evidenced by a 4% market
share. This means that it has limited pricing power compared with the larger
banks and focuses on more niche higher-risk segments of the market such as
mid-sized corporates, retail and SME lending.
Headline asset-quality metrics compare well with
peers'. The bank's impaired loans (Stage 3 IFRS 9) ratio improved to 3.3% at
end-1H20 (end-2019: 3.6%, end-2018: 5.9%), due primarily to restructuring and
write-offs. FCMB has a large stock of stage 2 loans (19% of the loan book) and
high borrower concentration with the 20-largest loans accounting for half of
gross loans, which exposes the bank to event risk. The debt-relief book was 20%
of total loans at end-1H20, slightly above the sector average.
In addition, Fitch believes that FCMB's strong reserve
coverage of 167% at end-1H20 provides strong buffers against asset-quality
erosion over the next 12-18 months, due to the economic fallout caused by the
coronavirus crisis. Oil and gas sector exposure measured at a high 31% of the
loan book and 143% of Fitch Core Capital (FCC) at end-1H20, mainly derived from
the upstream sector, which we consider to be more vulnerable to a lower oil
price environment. We believe that asset-quality risks remain to the downside,
particularly when considering operating environment risks and the bank's highly
dollarised balance sheet, which creates foreign-currency (FC) risk due to
currency shortages.
FCMB's profitability metrics typically lag behind
those of other small Nigerian banks, as evidenced by an annualised operating
profit/ risk-weighted assets (RWA) ratio of 1.4% in 1H20, compared with a
sector average of around 4%. This is due to higher loan impairment charges
(LICs), which consumed 51% of pre-impairment profits in 1H20. We expect FCMB to
remain profitable in 2020, although we expect earning and profitability metrics
to be somewhat under pressure in the next 12-18 months, owing to lower yields
on government securities and higher LICs.
The bank's FCC ratio (15% at end-1H20) is in line with
that of similarly sized peers, but should be considered in the context of high
concentration risks, including exposure to the oil and gas sector, and high
balance-sheet dollarisation, which exposes FCMB's capital to RWA inflation
should the naira further depreciate. At end-1H20, FCMB's capital adequacy ratio
of 15.9% at end-1H20 was only providing limited headroom above the regulatory
minimum requirements of 15%.
FCMB is more reliant on wholesale funding than peers,
with customer deposits forming 69% of total funding at end-1H20. The balance
comes from market funding, including borrowing from development financial
institutions, on-lending facilities and a local-currency bond programme,
leading to a higher cost of funding than most peers. Positively,
customer-deposits growth has been rapid in recent years, which served to bring
the bank's loans/customers deposits down to 74% at end-1H20 (end-2018: 80%).
Local-currency liquidity is ample, with excess
liquidity placed in government securities. FCMB's funding in foreign currency
remains largely short-term on a contractual basis, exposing it to maturity
mismatches, with customer deposits representing the bulk of the bank's
short-term commitments. That said, behavioural data suggests that foreign
currency funding is more stable.
Support Rating and
Support Rating Floor
Sovereign support to banks cannot be relied on given
Nigeria's weak ability to provide support, particularly in foreign currency.
The Support Rating 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 on receiving full and timely extraordinary support from the
Nigerian sovereign if any of the banks become non-viable.
National Ratings
FCMB's National Ratings reflect the bank's
creditworthiness relative to that of other issuers in Nigeria and are driven by
the bank's standalone strength. FCMB is rated below the larger banking peers
due to its smaller franchise and limited capital buffers. FCMB's National
Short-Term Rating is the lower of the two possible options for a 'BBB(nga)'
National Long-Term Rating under Fitch's criteria, reflecting potential risks to
funding and liquidity from market instability.
Rating Sensitivities
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Best/Worst Case Rating
Scenario
International scale credit ratings of Financial
Institutions and Covered Bond issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a worst-case
rating downgrade scenario (defined as the 99th percentile of rating
transitions, measured in a negative direction) of four notches over three
years. The complete span of best- and worst-case scenario credit ratings for
all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario
credit ratings are based on historical performance.
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