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Concern over bank’s bad loans
After spiking in 2011 to 4.6 per cent from around one per cent in prior years, non-performing loans (NPL) at First Citizens Bank remained high at 4.3 per cent of gross loans as of June 2014, Moody’s Investors Service said in its most recent credit opinion of the bank. “Management anticipates collections on its larger problem loans this year, though its NPL ratio should remain elevated by historical standards given a still sluggish economic growth and a rapid expansion into consumer lending.
“The latter now represents about 15 per cent of the total book, up from 11 per cent in 2011, largely composed of installment loans (57 per cent), auto loans (23 per cent), and credit cards (20 per cent),” Moody’s said.
Reserve coverage of NPLs, at 67 per cent, remains well below the pre-crisis average of approximately 300 per cent because of a steady decline in provisioning, sizeable charge-offs in 2011 and a change in accounting standards, the ratings agency said. This concern is somewhat mitigated by the bank’s prudent underwriting standards, it added.
“We also highlight the risks for the bank’s asset quality arising from the significant exposures to construction projects, largely related to urban development projects sponsored by the government. These loans comprise about a quarter of the loan portfolio and are equal to 75 per cent of the Tier 1 capital.
Further, single borrower concentrations are relatively high, with top 20 borrowers comprising 5.5 times (5.5x) (the) producer price index (PPI). About half of these exposures are devoted to public sector loans, which are mostly guaranteed by the government,” Moody’s said.
Public sector lending is largely devoted to urban development, housing endeavours and an airline, Moody’s said. The rating agency said because of a significant dollarization of the balance sheet, First Citizens is exposed to credit and market risks due to potential currency mismatches. As of September 2013, 33 per cent of assets and 35 per cent of liabilities were in foreign currency (around two thirds in US dollars), Moody’s said.
“The bank has managed these risks well thus far, partly helped by a stable exchange rate,” the opinion note said. Moody’s said First Citizens has “deteriorating profit margins given narrowing lending spreads and weakening efficiency,” explaining that “the steady decrease in the net interest margin (NIM) to 3.3 per cent as of June 2014 from 4.2 per cent in fiscal year 2010 illustrates a continued narrowing in lending spreads despite the recent sharp increase in higher-margin consumer loans.”
Declining profitability metrics also reflect a tightening competitive environment and do not fully leverage the bank’s market presence or funding advantages, Moody’s said. Further, core earnings have been increasingly eroded by rising operating expenses, leading to a higher cost income ratio of 52 per cent in June 2014, from 45 per cent in fiscal year 2010, Moody’s said.
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