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Negative outlook for First Citizens
Credit rating agency Moody’s has affirmed First Citizens Bank Limited’s ratings but changed its outlook on the state-owned bank to negative on local currency deposits and foreign currency debt. The bank’s foreign currency deposit outlook remains stable.
Moody’s Investors Service affirmed First Citizens Bank Limited’s (FCB) C-standalone bank financial strength rating (BFSR), which maps to a baa1 baseline credit assessment (BCA), and changed the outlook to negative from stable. The bank’s A2 and Prime-1 long and short term local currency deposit ratings were also affirmed and the outlook was changed to negative from stable.
The agency also affirmed FCB’s Baa1 and Prime-2 foreign currency deposit ratings, with a stable outlook, as they are constrained by T&T’s Baa1 country ceiling for foreign currency deposits. It affirmed First Citizens (St Lucia) Limited’s A2 long-term foreign currency senior debt rating, and changed the outlook to negative from stable, as it is mapped directly from the bank’s local currency deposit rating and is unconstrained by the A1 foreign currency ceiling for bonds and notes for T&T.
In its ratings rationale, Moody’s said the change to negative on FCB’s standalone ratings reflects the weakening of the bank’s profitability indicators during the past three years, due to declining net interest margins and rising operating costs. In addition, asset quality remains weak relative to the bank’s historical standards.
Still, modest economic growth in T&T points to further pressure on asset quality and credit costs. FCB’s declining profitability metrics also reflect tighter competition and do not fully reflect the bank’s strong market presence or core funding advantages, the agency said.
Notwithstanding an increase in net interest income in fiscal year 2013, the net interest margin stood at 3.4 per cent, down from 4.2 per cent in 2010, reflecting a narrowing of lending spreads. Though it is expected that the net interest margin will benefit from the recent refinancing and prepayment of expensive long term debt, reflecting proactive treasury management, competition will continue to pressure lending rates.
Core earnings have also been increasingly consumed by operating expenses, leading to a higher cost income ratio of 54 per cent from 45 per cent in 2010. Moody’s noted that efficiency improvements during the first quarter of fiscal year 2014 was driven by the bank’s emphasis on lower cost internet and mobile banking, although it is uncertain whether this improvement will be sustainable going forward given pressure on margins.
After spiking in 2011 to 4.6 per cent from around 1 per cent in prior years, non-performing loans (NPLs) remained elevated at about 4 per cent of total loans as of fiscal year ending (FYE) September 2013.
Management anticipates collections on its problem loans this year, however the NPL ratio is expected to remain high given still sluggish economic growth. Reserve coverage of NPLs at 65 per cent as of September 2013 also remains well below the pre-crisis average of approximately 300 per cent because of sizeable charge-offs in 2011, a steady decline in provisioning levels, and a change in accounting standards.
Moody’s said the negative outlook is not directly related to recent corporate governance concerns stemming from the ongoing audit on the IPO completed in September 2013. The audit was triggered by the purchase of a sizeable amount of shares by the bank’s former chief risk officer Philip Rahaman. FCB has acted aggressively to address this issue, announcing on March 25 that it had dismissed the executive.