GCR Affirms First City Monument Bank Limited’s rating of A-(NG); Outlook Negative

25 Aug 2017 In Rating Notifications

GCR Affirms First City Monument Bank Limited’s rating of A-(NG); Outlook Negative

Lagos Nigeria, 25 August 2017 - Global Credit Ratings has affirmed the national scale credit ratings assigned to First City Monument Bank Limited of A-(NG) and A2(NG) in the long term and short term respectively; with the outlook accorded as Negative. The ratings are valid until August 2018.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to First City Monument Bank Limited based on the following key criteria:

The accorded ratings reflect First City Monument Bank Limited’s (“FCMB”) financial and competitive position as a mid-sized (Tier 2) bank in Nigeria based on its key financial performance metrics. Despite improved operating performance in FY16, the bank remains exposed to ongoing challenges in the domestic operating environment including slow economic growth, currency weakness, foreign exchange (“forex”) shortages and policy uncertainty, that continue to exert pressure on banks’ (including FCMB) asset quality and earnings.

Shareholders’ funds grew by 9.6% at FY16, underpinned by retained earnings. Capital adequacy was, however, impacted by inflated risk weighted assets (mainly due to the effect of naira depreciation on the balance of risk-weighted assets denominated in foreign currency) which led to a slight decline in the risk weighed capital adequacy ratio (“CAR”) to 16.5% at FY16 (FY15: 16.9%), although remaining above the 15% statutory minimum requirement.. At 1H FY17, the ratio was reported at an improved 17%.

Although the gross non-performing loan (“NPL”) ratio improved to 3.7% in FY16 (FY15: 4.2%), this was chiefly supported by the loan book clean-up exercise undertaken by the bank, with impaired credits totaling N32.5bn written off the bank’s loan book during the year. Given these write offs, specific coverage of impaired loans declined to 25.5% at FY16 (FY15: 45.2%). The NPL ratio rose to 4.7% at 1H FY17, but remained within the regulatory limit of 5%. Management has tightened lending criteria, established a dedicated unit to focus on recoveries, and committed to diversify the loan book by targeting lending to less susceptible sectors to contain NPL formation and ensure a quality loan book going forward.

A matching of assets/liabilities maturities at FY16 showed cumulative liquidity gaps across the ‘less than 12 months’ maturity buckets. The liquidity gap stood at N253.7bn in the ‘less than 30 days’ maturity bucket and equated to 1.4x capital at FY16. Furthermore, although the bank closed with 31.2% statutory liquidity at FY16, liquidity pressure was evidenced as zero buffer was maintained above the 30% statutory requirement at some points during the year. This pressure has persisted into 1H FY17, with the statutory liquidity ratio at 30.1%.

Notwithstanding the 150.4% escalation in impairments charges to N35.5bn, net profit after tax grew 3.4x to N12bn during FY16. Growth was mainly supported by large one-off revaluation gains booked on net foreign currency positions arising from Naira devaluation during the year. Accordingly, ROaE and ROaA ended stronger at 10.4% (FY15: 4%) and 1.4% (FY15: 0.5%) in FY16 respectively.  Unaudited financial results at 1H FY17, reported pre-tax profit of N2.5bn, representing an annualised 63.8% decline.

Upward movement in the rating(s) or outlook could result from sustained improvement in the bank’s profitability, asset quality, capital and liquidity metrics, as well as an enhanced competitive position. Negative rating action may follow pressure on asset quality, profitability, capital and/or liquidity metrics.

 

 

 

NATIONAL SCALE RATINGS HISTORY

Initial rating (February 2000)

Long term rating: A+(NG)

Short term rating: A1(NG)

Rating outlook: Stable

 

Last Rating (April 2017)

Long term rating: A-(NG)

Short term rating: A2(NG)

Rating outlook: Negative

ANALYTICAL CONTACT

Primary Analyst

Adeyinka Olowofela

Credit Analyst

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Committee Chairperson

Dave King

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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017

Nigerian Financial Institutions Overview (2017)

FCMB rating reports (2000-16)

Glossary of Terms/Ratios (February 2016)

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLI WEB SITE AT:  HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE ON THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT www.globalratings.com.ng.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The ratings were solicited by, or on behalf of, First City Monument Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.

First City Monument Bank Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to First City Monument Bank Limited with no contestation of the rating.

The information received from First City Monument Bank Limited and other reliable third parties to accord the credit rating included the 31 December 2016 audited annual financial statements (plus four years of comparative numbers), full year detailed budgeted financial statements up to 31 December 2017 and unaudited financial statements to 30 June 2017. In addition, information specific to the rated entity and/or industry was also received.

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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