GCR Extends FCMB Rating Watch Negative Outlook

• FCMB Breached Single Obligor Limit
• 20 Borrowers Account for 46% of Gross Loans
• Asset Quality Metrics Strained by Loan Concentration
• Credit Losses are Rising at a Pace
• Non-performing Loan Rises
• Stage 2 Loan Nears 30%
• Large Legacy Foreign Currency Syndicated Loan Drive NPL Higher
• 5 Names Breaches Single Obligor Limit of 20%
• Credit Migration to Stage 3 Loan Likely

GCR Ratings (GCR) has affirmed First City Monument Bank Limited’s national scale long and short-term issuer ratings of A-(NG) and A2 (NG) respectively, with the Rating Watch Negative outlook extended due to the planned recapitalisation of the consolidated FCMB Group Plc.

According to GCR, the rating watch negative on First City Monument Bank Limited (FCMB) follows ongoing pressure on capitalisation from the adverse impact of macroeconomic environment on the loan book.

The emerging market rating agency said the rating is balanced against a sound funding structure, good liquidity and competitive position, and FCMB Group Plc’s planned equity capital raise of N150 billion in 2024.

GCR considered FCMB the core operating entity within the FCMB Group, and as such, the national scale issuer ratings on the bank reflects the strengths and weaknesses of the group.

The ratings firm said FCMB’s asset quality metrics have been strained by increased lending concentrations, rising credit losses and a high portion of foreign currency loans due to the significant Naira devaluation and other macroeconomic challenges.

As of 31 December 2023, the non-performing loans (NPL) ratio registered at 4.1% from 3.7% in 2022 while credit loss ratio was 3.8% as at the same date, trending further up after 2023-year end, the rating note stated.

GCR stated in its rating note that the percentage of stage 2 loans to gross loans increased to 29.2% in 2023 from 22.1% in the comparable period in 2022.

The surge in the non-performing loans of the bank largely constitutes legacy foreign currency (FCY) syndicated loans to the oil and gas and power sectors.

“While management indicated that most of these stage 2 loans have been restructured and are performing in line with restructured terms, we believe that they remain susceptible to credit migrations amidst macroeconomic constraints, heightening credit risk,” GCR Ratings said in its note.

GCR analysts noted that FCMB’s obligor concentration remains high, with the twenty largest obligors accounting for 46.1% of gross loans as of 31 December 2023.

Again, this shows a steep increase when compared to 41.2% reported in December 2022, most of which exhibit weak credit profiles and low internal assessments.

The rating note hinted that five names have breached the single obligor limit (SOL) of 20% of shareholders’ funds.

“Although the bank currently benefits from regulatory forbearance, we expect these single obligor limit breaches to persist barring any major remedial actions,” GCR Ratings said in its update on the bank.

It is noted that the impact of the Naira devaluation resulted in an increase in FCMB’s foreign currency exposures to 53.0% of gross loans at end-December 2023 from 42.0% in December 2022.

GCR said most of the foreign currency facilities extended to the oil and gas sector constituted 29.0% of the loan book in December 2023 compared to 27.5% in December 2022.

“The group is in the process of converting some legacy foreign currency loans and the unhedged portion of the foreign currency loan book to Naira as foreign currency availability improves.”.

For the bank, capitalisation is a negative factor, according to GCR Ratings. The rating agency said although the group shored up its capital base through the issuance of series 2 Additional Tier 1 (AT1) Capital in October 2023, the inherent headroom from the capital raise was largely eroded by a further naira devaluation.

The rating note stated that as a result, the GCR core capital ratio registered at 15.1% as of 31 December 2023 and is expected to remain between 13-15% in the near term.

However, the group plans to raise N150 billion in equity capital through a rights issue in 2024, which could improve GCR core capital ratio to about 18% over the outlook horizon.  This is expected to positively impact GCR capitalisation assessment, barring any further major naira devaluation.

However, if the planned equity capital fails to materialise within the stipulated timeframe and the GCR core capital ratio remains below 15%, the rating agency said it would downgrade the rating in the near term.

According to GCR, the group’s competitive position is a rating strength, underpinned by its diversified business operations.

As of 31 December 2023, the group comprised seven direct subsidiaries and four indirect subsidiaries, with a growing franchise across different financial services segments including banking, consumer finance, investment management, and investment banking.

Analysts noted that the group continues to strengthen its market position through organic and inorganic strategies, leveraging technology, collaborations, and its international presence via the FCMB UK subsidiary.

The increasing presence in the non-bank financial services segment bodes well for the group, as it provides cross-selling opportunities, improves earnings capacity and diversification, particularly given the highly competitive nature of core banking activities in the Nigerian market, according to GCR Ratings.

With a balance sheet size of N4.4 trillion or USD4.9 billion as of 31 December 2023, FCMB accounted for approximately 4.0% of the Nigerian banking resources, the rating note revealed.

Meanwhile, GCR Ratings said it assessed funding and liquidity as a positive rating factor. The group is predominantly funded by customer deposits, which constituted 84.6% of the funding base as of 31 December 2023.

This is an improvement from 78% recorded in December 2022. Customer deposits grew by 58.9% to N3.1 trillion or USD3.4 billion in December 2023, underpinned by a strong retail franchise and low-cost deposits mobilisation strategy.

The rating note stated that nonetheless, current and savings account (CASA) deposits constituted a lower 61.6% of the customer deposits book in 2023 versus 62.8% in 2022 due to the faster growth in term deposits during the year.

This, coupled with the rising interest rate environment, led to a higher cost of funds of 5.8% in 2023, from 5.0% in the prior year, with a further increase expected following the 600bps hike in the monetary policy rate (MPR) in the first quarter of 2024.

Notwithstanding, FCMB’s customer deposits book is diversified, with the top twenty depositors accounting for 17.0% of the customer deposits as of 31 December 2023 from 14% in 2022.

The rating note stated that the bank’s balance sheet is sufficiently liquid, as GCR liquid assets to customer deposits and wholesale funding registered at 45.1% and 4.7x respectively as of 31 December 2023.

“From a regulatory standpoint, the bank’s liquidity ratio was 42% as of 31 December 2023, exceeding the regulatory minimum of 30%”.

Looking ahead, GCR expects some liquidity stress in the Nigerian banking sector following the recent increase in cash reserve requirements (CRR) for commercial banks to 45% from 32.5% effective February 2024.

Nonetheless, analysts said the bank’s liquidity ratio is expected to remain within the regulatory threshold based on the outlined liquidity management strategy and the reduction in the regulatory minimum loan-to-deposit ratio to 50% in April 2024 from 65% previously.

Outlook statement

The Rating Watch Negative reflects a weak GCR core capital ratio and pressure on capitalisation from the adverse impact of macroeconomic environment on the loan book.

“If the planned capital raise in the short term materialises, it would support the GCR core capital ratio at about 18% over the next 12 months

“…otherwise, we would lower the ratings in the near term. Credit migrations to IFRS 9 stage 3 classification are likely because of the weak macroeconomic climate, with the credit loss ratio registering between 3%-4% and a gradual resolution of the single obligor limit breaches over the next 12–18 months.

“While the funding structure remains sound, CBN’s contractionary monetary policy stance could moderate the liquidity position over the outlook horizon,” GCR Ratings explained.