Lagos Nigeria, 3 August 2018–Global Credit Ratings has accorded national scale long term and short term ratings of A-(NG) and A2(NG) respectively, to Coronation Merchant Bank Limited; with the outlook accorded as Stable. The ratings are valid until June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Coronation Merchant Bank Limited (“Coronation MB”, “the bank”) based on the following key criteria:
The ratings reflect Coronation MB evolving competitive position in the merchant banking subsector since commencement of operation in the second half of FY15. The bank has been able to leverage off its experience and track record of over two decades in the financial services industry. Furthermore, cognisance is taken of the fact that the bank has engaged a pool of experienced professionals to drive its new strategic intent.
Capitalisation is considered adequate for the current level of operation. While shareholders’ funds grew to N29.2bn at FY17, capital adequacy ratio (“CAR”) equated to a lower 24.8% (FY16: 40.1%) due to increase in risk weighted assets, but remained above the required minimum of 10% for merchant banks. Also, management has also commenced the process to raise debt capital in 2H FY18 to further support operations.
Asset quality metrics remained sound as the bank is yet to record any delinquent asset since commencement of its merchant banking operation. The loan book has been largely characterised by short-dated trade finance facilities granted to large corporates. Total loan loss provision stood at N8.2m, following a write back of N51.6m in FY17.
The bank’s regulatory liquidity ratio stood at 53.4% at FY17 (FY16: 51.3%), against the required minimum of 20% for the subsector. However, liquidity gap of N25.1bn (FY16: N36.7bn) was reflected in the less than one month matching of assets and liabilities. Further supporting the bank’s liquidity profile is the cash and equivalent of N24.4bn as at FY17 and a sizeable 66.6% of its investment securities in Treasury bills (T-bills”) and Federal Government of Nigeria bonds (“FGN bonds”). Also, Coronation MB successfully raised funds through commercial paper (“CP”) issue in 1H FY18 which received 180% subscription level, equating a total of N18.2bn. This is to further aid balance sheet management, and considered additional support to the rating.
Performance metrics moderated in FY17, underpinned by increase in cost of funding which was largely triggered by the high interest rate in operating environment during the period. As such, while the bank recorded a 66.6% rise in interest income, interest expenses rose by a higher 166.8% and resulted in 3.5% decline in net interest income. Furthermore, profitability was constrained by 29.6% increase in operating expenses, given the increase in staff and IT upgrade cost. As such, pre-tax profit equated to N4.9bn in FY17, representing 5.1% decline from FY16 level. Consequently, return on average equity and assets (“ROaE” and “ROaA”) closed the year at 16.8% and 3.9% respectively from 21.6% and 5.6% respectively in FY16. Also, performance as at 1H FY18 appears somewhat in line with FY17 actual, albeit below budgeted figures on annualised basis.
An upward movement in the ratings may follow a sustained improvement in profitability and earnings, while maintaining sound asset quality metrics. Furthermore, a downward review of the ratings may result from a significant decline in the asset quality, capitalisation or liquidity profile of the bank. Furthermore, a significant decline in earnings or profitability, such that the bank is unable to compete with peers, may lead to a negative rating action.
NATIONAL SCALE RATINGS HISTORY
Initial rating (May 2016)
Long term: A-(NG)
Short term: A2(NG)
Rating Outlook: Stable
Last rating (June 2017)
Long term: A-(NG)
Short term: A2(NG)
Rating Outlook: Positive
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for rating Banks and Other Financial Institutions, updated March 2017
Glossary of Terms/Ratios, February 2016
Coronation MB rating report (2016-17)
RATING LIMITATIONS AND DISCLAIMERS
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and (d) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The ratings were solicited by, or on behalf of, Coronation Merchant Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.
Coronation Merchant Bank Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings above were disclosed to Coronation Merchant Bank Limited with no contestation of/changes to the ratings.
The information received from Coronation Merchant Bank Limited and other reliable third parties to accord the credit ratings included the latest audited financial statements at 31 December 2017 (plus two years of audited comparative numbers), latest internal and/or external report to management, full year budget for 2018 and most recent management accounts to 30 June 2018. In addition, information specific to the rated entity and/or industry was also received.