FSDH downgraded after converting its licence to a merchant bank
First Securities Discount House Limited (FSDH) has received Central Bank of Nigeria (CBN) approval to convert its licence to that of a merchant bank in Nigeria. In July 2012, GCR had reaffirmed FSDH’s ratings as follows:
National scale long term: A+(NG)
National scale short term: A1(NG)
Although FSDH’s balance sheet continues to reflect the profile of a discount house, with high levels of liquidity and low credit risk, the refocus of the business to a merchant banking operation will increase the risk profile. Credit risk for a discount house relates primarily to the commercial bill portfolio, which for FSDH had amounted to only 11% of total assets at FYE11. Risk management structures will therefore need to be bolstered going forward, to ensure that loan growth is pursued prudently in a challenging and highly competitive operating environment.
Discount houses in Nigeria are generally rated higher than similar sized banks given the narrowly defined nature of their business, which is to largely facilitate liquidity in the market. The challenge for these businesses has been the relevance for discount house operations in a maturing capital market, where banks are able to offer many of these services. In this respect, FSDH’s move is not unexpected.
Nevertheless, the rating differential between discount houses and banks has prompted GCR to downgrade FSDH’s ratings to the following:
National scale long term: A-(NG)
National scale short term: A2(NG)
Given that FSDH has not yet commenced with meaningful merchant banking operations, GCR would need to monitor the changing risk profile of the balance sheet, reflected in the award of a rating watch outlook. The first meaningful analyses will only likely be on the half year result to June 2013, when this rating will be reviewed by GCR.
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