Monday, January 22, 2018

...US agency affirms First Citizens’ financial strength

Moody’s Investors Services, the US-based ratings agency, has affirmed the financial strength of State-owned First Citizens but changed its outlook from stable to negative because of weakening profitability indicators at the bank during the past three years.

Moody’s said the negative outlook “is not directly related to recent corporate governance concerns stemming from the ongoing audit on the Initial Public Offering (IPO) completed in September 2013”.

It added: “Additional downward ratings pressure could arise, however, should governance issues prove to be more widespread.”

The outlook rating change comes as the bank’s IPO is under investigation by auditors Pricewaterhouse Coopers (PWC), on behalf of the Ministry of Finance, after its former chief risk officer Philip Rahaman acquired 656,588 shares and disposed of 634,588 shares four months later.

“The audit was triggered by the purchase of a sizeable amount of shares by the bank’s chief risk officer against the aim of a broad distribution to the public. (First Citizens) has acted aggressively to address this issue, announcing on March 25 that it has dismissed the executive,” Moody’s noted.

The final report was handed over to Finance Minister Larry Howai yesterday.

The Express understands that all share purchases over 20,000 stock units by the bank’s staff, including chief executive Larry Nath and corporate secretary Sharon Christopher, were reviewed.

In its ratings outlook report dated March 28, Moody’s affirmed the bank’s stand-alone financial strength at C—and its long and short-term local currency deposit ratings at A2 and Prime-1 but changed the general outlook from stable to negative.

The bank has had a stable outlook by Moody’s since 2011.

Moody’s said the change in the outlook to negative on First Citizens stand-alone 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 Trinidad and Tobago points to further pressure on asset quality and hence on credit costs. First Citizens declining profitability metrics also reflect tighter competition and do not fully reflect the bank’s strong market presence or core funding advantages,” it said.

Moody’s said the bank’s challenges were:

1. A narrowing of lending spreads: 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. 2. 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.

3. Increase in Non-Performing Loans (NPLs). After spiking in 2011 to 4.6 per cent from around one per cent in prior years, non-performing loans remained elevated at about four per cent of total loans as of financial year 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