FCMB Thrives in Face of Uncertainty as Asset Quality Improves

Despite the oil price slump and operating environment disruption due to the coronavirus pandemic, First City Monument Bank Group (FCMB) Plc is able to maintain good asset quality.

In short, it has one of the lowest Non-Performing Loans (NPLs) in the banking sector, a rare feat, given the unstable macroeconomic environment it operates in.

A nonperforming loan (NPL) is a loan in which the borrower is in default and hasn’t made any scheduled payments of principal or interest for some time.

When NPLs grow or spiral out of proportion due to porous risk management strategy (poor risk management strategy and headwinds, a banking sector crisis is inevitable.

First City Monument or FCMB Group’s NPLs stood at 3.30 percent as at June 2021- an improvement from 3.50 percent in 2020-, which is far lower than the 5 percent threshold by the regulator.

The chart shows the lender’s asset quality has been improving over the past three years, and the only times it slightly exceeded the threshold were in 2015 and 2018.

It is impressive that FCMB was able to control bad loans in 2016, the year the sharp drop in crude oil price tipped the country into its first recession in 25 years.

Of course, investors were horrendously stumped by the tumult in the economy during  2015-2016, as banks exposure to the oil and gas hit a crescendo; consequently,  the central bank was forced to continually devalue the currency to protect the external reserve, while the introduction of capital controls by the regulator spooked foreign investors who fret that getting their money out of the country was difficult.

In 2020, Nigeria, where the oil sector accounts for about 9 percent of economic output but about three-quarters of export revenues and nearly all foreign exchange, also has to deal with record low oil prices, caused by both pandemic and an oil price war between Saudi Arabia and Russia.

In short, the lockdown in the biggest states in Nigeria and the indefinite suspension of international flights drove the country into its worst recession in the third quarter of 2020.

In May 2020, the central bank approved a regulatory forbearance for the restructuring of credit facilities in the Other Financial Institutions (OFI) in order to further mitigate the impact of the COVID-19 pandemic on households, businesses and regulated institutions. The apex bank had reduced the interest rates on its intervention loans from 9% to 5%, while offering to rollover moratorium granted on all principal payments on a case by case basis.

FCMB has a well-diversified loan portfolio, and an excellent risk management strategy makes it easier to surmount the macroeconomic headwinds.

It largest allocation of loans is to the downstream oil and gas, N144.15 billion; individual bank, (N125.92 billion); Manufacturing, (N110.41 billion); Real Estate (N101.45 billion); Finance and Insurance, N73.56 billion; Commerce, N72.65 billion, and Power and Energy, (N65.14 billion).

With the rebound in crude oil price that started in January and the successful rollout of the vaccine, it is expected that there will be further improvement in FCMB’s asset quality.

In the first quarter of the year, the economy expanded by 0.51 percent, from growth of 0.11 percent in the fourth quarter of 2020, according to recent data from the National Bureau of Statistics (NBS).