Fitch Ratings has affirmed First City
Monument Bank Limited's (FCMB)
Long-Term Issuer Default Rating (IDR)
at 'B-'. The Outlook is Stable. A full list
of ratings is at the end of this
commentary.
Key Rating Drivers
IDRS, VR AND National Ratings
The IDRs of FCMB are driven by its
standalone credit profile, as defined
by its Viability Rating (VR). This
reflects FCMB's weak financial metrics,
partly due to the bank's limited
company profile and higher-risk
business model, as well as the
challenging operating environment in
Nigeria.
The operating environment in Nigeria
remains tough, with the country
having recently emerged from a
recession. Although access to foreign
currency (FC) has eased, many
borrowers retain limited capacity to
service obligations and there are few
opportunities for banks to grow their
loan portfolios.
FCMB's modest franchise is illustrated
by the bank's small (4%) market share
of domestic credit. In our view, this
drives a high-risk business model,
including high concentrations and a
high volume of lending to smaller
corporates and commercial customers.
This leaves the bank particularly
vulnerable to macroeconomic
challenges. The franchise also
constrains earnings, with operating
profitability well below the sector
average due to high loan impairment
charges (LICs) and an above-average
cost of funding, hurting FCMB's ability
to build up capital.
We view FCMB's asset quality position
as vulnerable. FCMB's low impaired
loans/ gross loans ratio (5.7% at
end-1H18) relative to peers' has been
helped by a steady flow of write-offs
in 2017. Stage 2 loans under IFRS 9
accounted for 13% of gross loans at
end-9M18 and comprised mostly
restructured oil and gas exposures,
which are vulnerable to another oil
price correction. FCMB displays high
credit concentration by sector and by
obligor, exposing FCMB to the risk of
unexpected losses.
We view FCMB's capital position as no
more than adequate with a Fitch Core
Capital (FCC) ratio of 16.4% in 2017.
Capital, in our view, is vulnerable to
deterioration in asset quality
notwithstanding a sharp increase in
reserve coverage of impaired loans,
following the implementation of IFRS
9.
FCMB's FC liquidity improved in 2017,
in line with easing market conditions.
FCMB has remitted all state-related FC
deposits to the Central Bank of
Nigeria's treasury single account (TSA)
and has cleared all extended trade-
finance obligations. However, FC
liquidity remains tight, although
positively the bank has limited FC
short-term wholesale/bilateral
obligations.
The Stable Outlook on FCMB's Long-
Term IDR reflects our base case
expectation that the bank's financial
metrics will not change significantly
over the coming year.
FCMB's National Ratings reflect the
bank's creditworthiness relative to the
country's best credit and to that of
peers operating in Nigeria.
Support Rating And Support Rating Floor FCMB's Support Rating (SR) and Support Rating Floor (SRF) reflect uncertainty over the ability of the authorities to support banks,
particularly in FC.
In addition, there
are no clear messages from the
authorities regarding their willingness
to support the banking system. Our
view is that senior creditors cannot
rely on receiving full and timely
extraordinary support from the
authorities should a bank become non-
viable. Therefore, the SRF of all
Nigerian banks is at 'No Floor' and all
Support Ratings are '5'.
Rating Sensitivities
IDRS, VR, AND National Ratings
FCMB's IDRs are sensitive to a change
in the bank's VR. Although not a base
case, a downgrade of the VR is most
likely to be driven by weak
performance of the bank's
restructured oil book with migration
of some exposures from stage 2 to
stage 3 loans, in turn likely to be
driven by renewed pressure in oil
prices.
Positive rating action is unlikely in the
short-term given the still fragile
operating environment and FCMB's
niche franchise. An upgrade of the
bank's VR would require a material
improvement in the Nigerian
operating environment or a
significant expansion of the bank's
company profile translating into better
financial performance.
FCMB's National Ratings are sensitive
to a change in the bank's
creditworthiness relative to other
Nigerian bank issuers'.
Support Rating And Support Rating Floor.
An upgrade of FCMB's IDRs may also
result from sovereign support being
factored into the bank's ratings.
FCMB's SR and SRF could be upgraded
and revised higher, respectively, if
Fitch sees an improvement in the
authorities' ability to provide support
in FC, particularly for a systemically
important bank. An improvement in
the ability to support could be
indicated by further accumulation of
external reserves and a sustainable
exchange rate.
The rating actions are as follows:
Long-Term IDR affirmed at 'B-';
Outlook Stable
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No
Floor'
National Long-Term Rating affirmed
at 'BBB(nga)'
National Short-Term Rating affirmed
at 'F3(nga)'
Source: proshare
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