Moody’s Investors Service has assigned first-time long term global scale local-currency bank deposit and issuer ratings of B2 to First City Monument Bank Limited (FCMB) and Fidelity Bank Plc (Fidelity), and long term B3 global scale local-currency bank deposit and issuer ratings to Diamond Bank Plc (Diamond). The three mid-tier Nigerian banks account for approximately 12% of the country’s banking assets. Moody’s also assigned local currency bank deposit national scale ratings (NSRs) of A2.ng to FCMB and Fidelity and A3.ng to Diamond.
“The primary drivers of Moody’s assessment of FCMB, Fidelity and Diamond banks’ standalone credit profiles are their robust loss-absorbing buffers, above our global average for similarly rated peers, and their resilient local currency liquidity buffers. These strengths, however, are moderated by the challenging operating environment in Nigeria, as the oil and gas dependent economy slowly recovers from its 2016 recession,” says Akintunde Majekodunmi, vice president and banking analyst at Moody’s.
FCMB’s BCA of b3 reflects the bank’s robust levels of tangible common equity versus peers internationally. At year-end 2017, FCMB’s tangible common equity to risk-weighted asset ratio (TCE/RWA) was 13.7% which compares favourably to the b3 global peer average of 11%. As of December 2017, 55% of the bank’s loan book was denominated in foreign currency, and any further depreciation of the naira will inflate risk-weighted assets, thus reducing capital ratios. The bank’s nonperforming loan (NPL) ratio was just 4.7% as of December 2017, versus the banking system NPL ratio of 15.1% as of September 2017. FCMB’s exposure to upstream and midstream oil and gas sectors and foreign currency denominated loans leave the bank’s loan performance vulnerable to both global oil prices and the depreciation of the local currency, the naira.
Fidelity’s BCA of b3 reflects the bank’s resilient asset quality and relatively high provision coverage of NPLs. As of December 2017, Fidelity’s NPLs were 6.4% of gross loans which compares favourably against the banking system average of 15.1% as of September 2017. The bank’s coverage ratio, including regulatory reserves, was 109% which would provide capacity for the bank to write off some of its old NPLs and reduce the ratio. Although Fidelity’s high exposure to foreign currency denominated loans is a source of risk, the bank’s exposure to the oil and gas industry is relatively low at 26%. The bank’s oil and gas exposure is predominantly to the upstream segment which makes up 73% of oil and gas loans and which has not produced any NPLs in 2017, following the restructuring of these loans. Moody’s expect Fidelity’s NPL ratio to remain stable at the current level of about 6.5%.
Diamond’s BCA of caa1 reflects the bank’s high asset risks as indicated by its relatively high Moody’s adjusted NPL ratio (which adds accounts overdue by longer than 90 days but not impaired to the impaired loans stock) and credit costs which strained profitability, especially in 2017. Moody’s adjusted NPLs accounted for around 42% of gross loans as of December 2017. Diamond has relatively high exposures to the oil & gas sector (predominantly the trouble midstream sector) at 52% of total loans as of December 2017 and a high proportion of foreign currency denominated loans that make up 46% of the bank’s total loans. Though credit losses will remain elevated, asset risks will decline this year on account of resolution of some of its past due loans that have not been impaired.
The bank also faces relatively tight foreign currency funding, because the bank’s foreign currency loans to foreign currency deposits of 156% will require the bank to rely on confidence-sensitive market funding to support its dollar assets. Similar to other Nigerian mid-tier banks, dollar deposits contracted in 2017 and although we expect the situation to improve this year, mid-tier banks such as Diamond will likely remain under some pressure because competition for these deposits has increased. Additionally, about $330 million of Diamond’s foreign currency obligations are maturing within the next 18 months, a substantial amount relative to the bank’s foreign currency liquid assets.