Fitch Ratings has maintained First City Monument Bank Limited’s (FCMB) Issuer Default Ratings (IDRs), Viability Rating (VR) and National Ratings on Rating Watch Negative (RWN). FCMB’s Government Support Rating of ‘ns’ is unaffected. 

The maintained RWN reflects Fitch’s view that while FCMB stayed compliant with its minimum total capital adequacy ratio (CAR; 15.4% at end-3Q23 on an unconsolidated basis) requirement of 15% following the June devaluation, the risk of a breach remains. This considers that buffers over this requirement remain thin, in view of the risk of a further material devaluation of the naira. It also reflects increased risks to capital from large foreign-currency (FC)-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 CAR.

Fitch expects to resolve the RWN within the next six months when exchange-rate volatility has potentially receded, the impact on the CAR is clear and the second-order economic effects on loan quality become evident.

Key Rating Drivers

FCMB’s IDRs are driven by its standalone creditworthiness, as expressed by its VR of ‘b-‘. The VR reflects the concentration of the bank’s 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.

FCMB’s National Ratings reflect the bank’s creditworthiness relative to other issuers in Nigeria.

Fast Pace of Reforms: The recently elected president, Bola Tinubu, has pursued key reforms more quickly than Fitch expected, completely removing the fuel subsidy and causing the Nigerian naira to devalue within weeks of his inauguration. These reforms are overall positive for the sovereign’s credit profile but pose near-term challenges, including adding to inflationary pressures and risks of social unrest. The sharp depreciation of the naira has put pressure on banks’ capital ratios.

Moderate Franchise: FCMB is a mid-sized bank, representing about 4% of domestic banking system assets, and has limited pricing power compared with larger peers. Revenue diversification is moderate (2022: non-interest income represented 27% of operating income).

High Sovereign Exposure: Single-borrower credit concentration is high, with the 20-largest customer loans representing about 50% of gross loans and 2.5x Fitch Core Capital (FCC) at end-2022. FC lending is material (end-3Q23: 34% of net loans). Sovereign exposure through securities and Central Bank of Nigeria cash reserves is high relative to FCC (end-2022: about 650%).

High Stage 2 Loans: FCMB’s impaired loans (Stage 3 loans under IFRS 9) ratio increased to 4.4% at end-3Q23 (end-2022: 3.7%) and Fitch expects that to increase further in the near-term. Stage 2 loans (mainly FC-denominated to borrowers from oil and gas industry) increased to 27% of gross loans at end-3Q23 (end-2022: 22%) as a result of the devaluation and represent a key risk to asset quality.

Moderate Profitability: FCMB delivers moderate profitability, as indicated by operating returns on risk-weighted assets (RWAs) averaging 1.9% over the past four years. Profitability improved significantly in 9M23 as a result of large foreign-exchange revaluation gains stemming from the bank’s net long FC position that accompanied the naira devaluation.

Thin Regulatory Capital Buffers: FCMB’s bank-solo CAR had a limited buffer (40bp) over the minimum requirement of 15% at end-3Q23, having declined due to the devaluation of the currency. The issuance of NGN26 billion (end-3Q23: equivalent to 1.1% of RWAs) AT1 capital-qualifying securities in 4Q23 has increased buffers but Fitch considers these remain thin in view of the risk of a further material devaluation of the naira. The parallel market rate is currently trading at about 1,200/USD (end-3Q23: 770/USD official exchange rate).

Sound Liquidity Coverage: FCMB is primarily funded by customer deposits, which comprise a large percentage of current and savings accounts (end-2022: 65%). Depositor concentration is moderate, with the 20 largest representing 15% of the total at end-2022. Liquidity coverage in local and foreign currencies is sound, with liquid assets representing 30% of total assets at end-3Q23.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A sovereign downgrade could result in a downgrade of the Long-Term IDR and VR if Fitch believes that the direct and indirect effects of a sovereign default would likely erode capitalisation and FC liquidity insofar as to undermine the bank’s viability.

Absent a sovereign downgrade, a downgrade (including resolution of the RWN) could result from the combination of a further naira devaluation and a marked increase in the impaired loans ratio, resulting in a breach of minimum capital requirements without near-term prospects for recovery. It could also result from a severe tightening of FC liquidity.

A downgrade of the National Ratings would result from a weakening in creditworthiness relative to other Nigerian issuers.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The RWN on FCMB’s VR and IDRs would be removed and the ratings affirmed if Fitch determines that the bank will remain compliant with the minimum CAR requirements in case of a further naira devaluation, with sufficient capital buffers to accommodate increased credit concentration and loan-quality risks.

An upgrade of the National Ratings would result from a strengthening in creditworthiness relative to other Nigerian issuers.

References for Substantially Material Source Cited as Key Driver of Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.