Fitch Ratings has affirmed First City Monument Bank Limited's (FCMB) Long-Term Issuer Default Rating (IDR) at 'B-' and National Long-Term Rating at 'BBB+(nga)' and removed the ratings from Rating Watch Negative (RWN).

The Outlooks are Stable. A full list of rating actions is below.

The removal from RWN reflects FCMB's compliance with its regulatory total capital adequacy ratio (CAR) requirement of 15%, notwithstanding the sharp devaluation of the Nigerian naira since June 2023 and our expectation that with continued profitability and receding risks of a further material devaluation, FCMB will remain CAR-compliant.

Key Rating Drivers

FCMB's IDRs are driven by its standalone creditworthiness, as expressed by its 'b-' Viability Rating (VR). The VR balances the concentration of FCMB's operations in Nigeria's challenging operating environment, its moderate franchise, high credit concentrations, weak profitability and thin buffers over minimum capital requirements against healthy liquidity coverage. FCMB's National Ratings are lower than the highest-rated Nigerian banks due to FCMB's smaller franchise, weaker profitability and thinner capital buffers.

Challenging Environment: President Tinubu has pursued key reforms since he assumed office in May 2023, reducing the fuel subsidy and overhauling monetary policy, including by allowing the naira to devalue by over 65%. The reforms are positive for Nigeria's creditworthiness and FX market liquidity but pose near-term macroeconomic challenges for the banking sector.

Moderate Franchise: FCMB is a second-tier bank, representing 3% of domestic banking sector assets at end-2023. FCMB has weaker pricing power than larger banks and focuses on higher-margin segments such as mid-sized corporates and SME borrowers.

High Sovereign Exposure: Single-obligor credit concentration is very high, with the 20 largest loans representing 250% of Fitch core capital (FCC) at end-2023. Oil and gas exposure (end-2023: 29% of gross loans) is very high. These concentrations have increased following the devaluation of the naira in 1Q24. Nigeria sovereign exposure through securities and Central Bank of Nigeria cash reserves is very high relative to FCC (end-2023: over 500%).

High Stage 2 Loans: FCMB's impaired loans (Stage 3 loans under IFRS 9) ratio increased to 4.2% at end-2023 (end-2022: 3.7%). Specific loan loss allowance coverage of impaired loans was 75% at end-2023. Stage 2 loans (end-2023: 29% of gross loans; concentrated within oil and gas and largely US dollar-denominated) remain high and represent a risk to asset quality. Fitch forecasts the impaired loans ratio will moderately increase in the near term.

Moderate Profitability Metrics: Operating returns on risk-weighted assets averaged 2% over the past four years. They increased to 3.5% in 2023 from 1.9% in 2022, primarily driven by large FX revaluation gains stemming from a net long foreign-currency position that accompanied the naira devaluation. Profitability will benefit from higher interest rates in 2024.

Thin Capital Buffers: FCMB's FCC ratio (end-2023: 14.7%) is moderate in the context of its risk profile. The CAR (end-2024: 15.1%) has a thin buffer above the 15% minimum requirement but Fitch expects this to strengthen in the near term as FCMB raises core capital in an effort to comply with new paid-in capital requirements effective end-1Q26. FCMB will need to raise NGN397 billions of paid-in capital to meet the NGN500 billion requirement for a bank with international licence authorisation. FCMB would be subject to just a NGN200 billion requirement if it divested its UK subsidiary and downgraded to national licence authorisation.

Healthy Liquidity Coverage: Customer deposits represented 84% of total non-equity funding at end-2023. FCMB has a higher reliance on term deposits, which represented 39% of the total customer accounts at end-2023. Depositor concentration is moderate, with the 20 largest depositors representing 17% of the total at end-2023. Liquidity in local and foreign currency is healthy.

Rating Sensitivities

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

A sovereign downgrade could result in a downgrade of the VR and Long-Term IDR if Fitch believes that the direct and indirect effects of a sovereign default would be likely to have a sufficiently large effect on capitalisation and FC liquidity to undermine the bank's viability. However, this is unlikely considering the Positive Outlook on Nigeria's Long-Term IDRs.

Absent a sovereign downgrade, a downgrade could result from the combination of a sharp naira depreciation and a marked increase in the impaired loans ratio, resulting in a breach of minimum capital requirements without near-term prospects for recovery, or a severe tightening of foreign-currency liquidity.

A downgrade of FCMB's National Ratings would result from a weakening in its creditworthiness relative to other Nigerian issuers.

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

An upgrade of the VR and Long-Term IDR would require a sovereign upgrade and an improvement in operating conditions in conjunction with an improvement in the bank's financial profile.

An upgrade of FCMB's National Ratings would result from a strengthening in its creditworthiness relative to other Nigerian issuers.

The government's ability to provide full and timely support to commercial banks is weak due to its constrained foreign-currency resources and high debt-servicing metrics. The Government Support Rating is therefore 'no support', reflecting our view of no reasonable assumption of support for senior creditors being forthcoming should a bank become non-viable.

An upgrade of the GSR would require an improvement in the government's ability to provide support, which would most likely be indicated by an increase in international reserves and an improvement in debt servicing metrics.

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. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esgrelevance-scores.

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