Funding and liquidity is a strength to the rating. AIICO Capital’s funding structure largely comprises guaranteed income liabilities, with the underlying risks retained by the Manager. As at end-FY21, the liabilities stood at N39.8 billion and reflected a c.19% decline from the prior year due to major withdrawals by corporate entities that dominate the portfolio. These funds are non-core and are largely sensitive to movements in interest rates. Concentration risk in the funding base is high as top 20 depositors accounted for c.87% of FUM as at end-FY21. However, the Manager’s liquidity profile was good during the review period as GCR liquid assets covered the guaranteed Income liabilities 1x in FY21.
The earnings assessment reflects the steady revenue progression enjoyed from its long-term power supply contract with
Nigerian National Petroleum Company Limited (“NNPC”). This is further supported by the high proportion of foreign
currency earnings, with 70% of invoices denominated in USD. The EBITDA margin declined to 66.7% in FY21 (FY20: 72.6%)
due to scheduled maintenance but rebounded to 70.6% in 1H FY22. GCR thus expects the margin to be sustained
around 70% over the outlook period, well above peers, underpinned by the favourable pricing. This pricing mechanism
prevents under-recovery of income in periods of low power consumption by the customer.
Notwithstanding the rising competitive pressure within its domestic and Pan-African markets, DCP has sustained a sound earning base and cash flows, with the EBITDA margin registering at 47% over the last five years to FY21, well above the industry average. However, higher inflationary pressure, gas supply shortages, and extended plant maintenance during 1H FY22 saw sales volume and earnings margin decline slightly, albeit revenue increased 17% y/y supported by higher selling price in December 2021 to offset rising costs.
Greenwich MB’s funding and liquidity is robust and considered appropriate for its current operational scale. As of 30 June 2022, the bank was largely funded by customer deposits, which accounted for 81% of the funding base (FY21: 91.7%). Underpinned by the implementation of its outlined deposit mobilisation strategy, customer deposits increased significantly to N54.5bn as of 30 June 2022 from N509.8m in December 2020. However, concentration risk is evident, with the top twenty depositors accounting for 76.9% of the deposit book as of 30 June 2022 (FY21: 73.3%; FY20: 96.6%) with the bulk being wholesale funding from financial institutions. Although this is typical of Nigerian merchant banks, management envisages further diversification going forward as the bank intensifies the onboarding of more corporate customers.
Sterling Bank PLC is a standalone bank operating in Nigeria. Initially licensed as Nigeria’s first Merchant Bank, owned by the government post-independence, Sterling Bank has evolved over the decades, operating a national commercial banking license and publicly listed on the Nigerian Stock Exchange (NGX). Geographic exposure is limited to Nigeria, and about 85.9% of the bank’s credit exposures are domiciled in the South-South and South-West regions of the country as at FY21.
AFL has the largest integrated steel mill in Nigeria with rolling and melting capacity of 300,000 and 330,000 MT per annum respectively, which mainly serves the premium segment (where the Company enjoys considerable monopoly power) and the mid-segment of the construction sector. The Company’s ‘AFL Rebars’ are certified by ‘CARES UK’ and thus deemed to be of international standards (and direct substitutes for imports), making them suitable for large-scale constructions such as bridges, skyscrapers, dams etc. From a standalone perspective, AFL has maintained a strong earnings profile with average annual revenue growth of 35% and EBITDA margin of 19% since 2017, mostly in line with the Group’s earnings profile. This has largely supported comfortable leverage and liquidity metrics historically, albeit that working capital pressures caused some volatility in operating cashflows throughout the review period. GCR notes that working capital pressures have emanated from inventory accumulation due to sustained capacity expansion. Also supportive of the leverage profile are facilities from the Group (typically accounting for around 40% of total debt) which are interest free and are potentially flexible with regards to repayments. The liquidity profile is also boosted by support from the Group, as well as access to a relatively diverse pool of local and international financiers.
InfraCredit was incorporated as a limited liability company in October 2016, under a collaborative arrangement between Nigeria Sovereign Investment Authority (“NSIA”) and GuarantCo, with the sole mandate of providing guarantees to enhance the credit quality of local currency debt instruments (mainly bonds) issued by corporate entities to finance eligible infrastructure projects in Nigeria. InfraCredit commenced operations in 2017 and has its operational office in Lagos, Nigeria.
InfraCredit was conceptualised to have a blend of Nigerian public or government institutions, international Development Financial Institutions (“DFIs”), and private institutional investor base. Currently, InfraCredit is owned by four institutions, one of which is Federal Government of Nigeria (“FGN”) related entity, NSIA, with 38.56% equity stake. The other shareholders are InfraCo Africa Investment Limited ("InfraCo”), Africa Finance Corporation ("AFC"), and Leadway Assurance Company Limited (“Leadway”) with 28.64%, 27.24% and 5.56% equity stakes respectively as of 31 December 2021. Per its business plan and subsisting Shareholders’ Agreement (“SA”), the public institution’s stake in InfraCredit is expected to moderate to 25% over the medium term. However, NSIA and InfraCo have equal voting rights in InfraCredit following the agreement that NSIA will defer the rights and liabilities on a portion of its shares. Thus, voting rights for NSIA and InfraCo equals 31.8% each, while AFC and Leadway have 30.2% and 6.2% voting rights respectively.
Capitalisation is a positive ratings factor. Jaiz Bank’s GCR Capital Ratio of 29.2% as at end-FY21 improved from 23.1% in the prior year and places it in the intermediate level of GCR’s assessment. This was supported by a N3.3bn capital injection by an existing shareholder in FY21. GCR’s view on capital and leverage is positive on the back of an anticipated capital injection which could raise the Bank’s GCR Capital Ratio above 30% over the next 12-18 months.
The Group’s earnings profile is a positive rating factor. The insurance business registered a 3-year (FY18-FY21) CAGR of 21.3% in GWP to N66.9 billion, with an underwriting margin of 12.8% (FY20: 12.9%) in the non-life business and a return on revenue of 10.7% (FY20: 10.4%) in the life business in FY21. At this level, Custodian’s performance was better than its peers. Unrealised losses caused by the impact of market volatilities on the trading portfolio were offset by positive adjustments on the insurance liabilities to reflect the movement in estimated claims liabilities as determined by the actuary. Coupled with dividend income from other subsidiaries, Custodian’s operating profit was good at N13 billion, translating to an operating profit margin of 29.2% (FY20: 17.1%).
Leadway’s earnings are assessed within a moderately strong range, reflecting the moderation of sound operating margins by elevated volatility. With annuity premiums dominating the insurer’s business mix, the investment portfolio is tilted towards government bonds, which exposes profitability to some level of volatility. In this respect, a significant fair value loss was reported during the year under review, due to the mark-to-market of investment securities precipitating a corresponding reserve release, with the distortive effect resulting in an atypically high operating margin (>100%, FY20: 3.9%).