FCMB Gains 32% as Market Discounts Bank’s Weak Rating
Setting a new market valuation record, FCMB Plc was re-rated by large transactions on the financial services group shares outstanding in the local bourse.
The positive price movement recorded in the first trading week in 2024 was supported by equities investors’ sentiment, built on a positive earnings expectation.
Late in December 2023, Fitch Ratings kept First City Monument Bank Limited’s (FCMB) Issuer Default Ratings (IDRs), Viability Rating (VR) and National Ratings on Rating Watch Negative (RWN).
According to the rating note, the decision to keep the bank under watch 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, there is a risk of breaching regulatory benchmark of 15%.
The rating note said the bank’s capital position came under pressure following the June devaluation. Fitch Ratings considers that buffers over this requirement remain thin, given the risk of a further material devaluation of the naira.
The global rating agency spotted an increased risk 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.
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. It noted 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 rating note added 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 the end of Q3-2023 versus 22% in financial year 2022 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. Dangote Reacts to EFCC Visit to Headquarters
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 the end of the third quarter in 2023.
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