Fitch Affirms First City Monument Bank at 'B-'/Stable

Fitch Affirms First City Monument Bank at 'B-'/Stable

Fitch Ratings has affirmed First City Monument Bank (FCMB) Limited's Long-Term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook and Viability Rating (VR) at 'b- '. Fitch has also upgraded the bank's National Short-term Rating to 'F1(nga)' from 'F2(nga)' due to the bank's improving funding and liquidity. A full list of rating actions is below.

Fitch has withdrawn FCMB's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned FCMB a Government Support Rating (GSR) of 'no support' (ns).

Fitch has also withdrawn the Outlook on the National Long-Term Rating, which due to a clerical error, was incorrectly assigned.

KEY RATING DRIVERS

The VR reflects FCMB's exposure to Nigeria's volatile operating environment, a small franchise and high credit concentrations. This is balanced by the bank's improving funding and liquidity, moderate capitalisation and adequate asset quality for the rating. The latter partly reflects its fairly small loan book (45% of total assets) and large non-loan assets comprising mainly Nigerian government securities (B/Stable).

The Stable Outlook reflects Fitch's view that risks to FCMB's credit profile are captured by the current rating, with sufficient headroom under our base case to absorb the fallout from renewed operating-environment pressures.

We also affirmed FCMB's National Long-Term Rating reflecting its relative creditworthiness to that of peers in Nigeria.

Downside to Operating Conditions: Rising global risks will weaken domestic operating conditions. Inflation (17.7% in May 2022) is expected to remain stubbornly high, posing downside risks to our real GDP growth forecasts of 3.4% in 2022 and 3.2% in 2023. However, downside risks are somewhat mitigated by strong oil prices, which should also underpin growth in non-oil sectors and banks' asset quality.

Moderate Franchise: FCMB's franchise is moderate (with a 4% market share of total banking system assets), resulting in limited pricing power compared with larger banks, and driving the focus on higher-margin segments such as mid-sized corporates, retail and SME borrowers.

High Risk Appetite: We view FCMB's risk appetite as high due to the bank's focus on smaller corporates and SMEs. These customers are more vulnerable to the operating environment due to generally weaker balance sheets and an inability to access funding during periods of market uncertainty. FCMB's small franchise constrains its ability to diversify lending. Loan concentrations remain high both by sector and single obligor.

Adequate Asset Quality: FCMB's impaired loans (Stage 3 IFRS 9) ratio has remained broadly stable over the last two years. Its Stage 3 loan ratio deteriorated slightly to 4.1% at end-2021 (end-2020: 3%) due to new problem loans feeding through from Stage 2, against stronger loan growth and write-offs. FCMB's stock of Stage 2 loans (21%) is large and mostly restructured. The total restructured book accounts for 25% of total loans, slightly above the sector average. Reserves coverage of Stage 3 loans is sound (107% at end-2021) but reserves against Stage 2 loans are fairly low.

Weaker Profitability than Peers': FCMB's profitability metrics typically lag behind those of small bank peers despite the bank's reasonable net interest margin (NIM). The bank reported an annualised operating profit/risk-weighted assets (RWAs) of 1.1% in 2021. Loan impairment charges (LICs) consumed 38% of pre-impairment profit in 2021. FCMB's cost-to-income was high at 78% in 2021, compared with a market average of 60%.

Modest Capital Buffers: The bank's Fitch Core Capital (FCC) ratio (14.2% at end-2021) is in line with small bank peers. The ratio is somewhat flattered by the low risk weight density of its assets given the bank's significant government exposure. FCMB's regulatory capital adequacy ratio (CAR), at 15.4% at end-2021, was just above its minimum requirement of 15%. We also expect capital buffers will remain thin due to rapid growth. Risks to capital also stem from high credit concentrations and balance-sheet dollarisation.

Stable Funding, Sufficient Liquidity: FCMB is largely funded by granular retail and SME deposits (70% of total funding at end-2021, 72% in the form of current and saving accounts). FCMB has some reliance on wholesale funding (19% at end-2021), which combined with a price-sensitive deposit base, leads to higher funding costs than large banking peers. Local-currency liquidity is ample, with excess liquidity placed in government securities.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A combination of an increase of the impaired loans ratio above 10% and/or aggressive risk asset growth, resulting in a breach of regulatory capital requirements with no credible plan to restore buffers would put pressure on the VR and Long-Term IDR.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the ratings would require significant expansion of the bank's franchise and market share, and consistently strong capital buffers.

Sovereign support to commercial banks cannot be relied on given Nigeria's weak ability to provide support, particularly in foreign currency. The GSR is therefore 'ns', reflecting our view that senior creditors cannot rely on receiving full and timely extraordinary support from the government.

In upgrade of FCMB's GSR is unlikely as it would require a material improvement in Nigeria's financial flexibility.

VR ADJUSTMENTS

The Viability Rating of 'b-' is below the 'b' category implied score, due to the following adjustment reason: business profile (negative).

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. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.

APPLICABLE CRITERIA

National Scale Rating Criteria (pub. 22 Dec 2020)

Bank Rating Criteria (pub. 12 Nov 2021) (including rating assumption sensitivity)

ADDITIONAL DISCLOSURES

Dodd-Frank Rating Information Disclosure Form

Solicitation Status

Endorsement Policy

ENDORSEMENT STATUS

First City Monument Bank Limited UK Issued, EU Endorsed

DISCLAIMER & DISCLOSURES

All Fitch Ratings (Fitch) credit ratings are subject to certain limitations and disclaimers. Please read these limitations and disclaimers by following this link: https://www.fitchratings.com/understandingcreditratings. In addition, the following

SOLICITATION STATUS

The ratings above were solicited and assigned or maintained by Fitch at the request of the rated entity/issuer or a related third party. Any exceptions follow below.

ENDORSEMENT POLICY

Fitch’s international credit ratings produced outside the EU or the UK, as the case may be, are endorsed for use by regulated entities within the EU or the UK, respectively, for regulatory purposes, pursuant to the terms of the EU CRA Regulation or the UK Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, as the case may be. Fitch’s approach to endorsement in the EU and the UK can be found on Fitch’s Regulatory Affairs page on Fitch’s website. The endorsement status of international credit ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.