Announcements Financial Institutions Rating Alerts

GCR Affirms FBNQuest Merchant Bank Limited’s National Scale Long and Short-term Issuer Ratings of A-(NG)/A2(NG); Outlook Stable.

Lagos, 29 October 2021 – GCR Ratings (“GCR”) has affirmed FBNQuest Merchant Bank Limited’s national scale long and short-term issuer credit ratings of A-(NG) and A2(NG) respectively, with a Stable Outlook.

Rated Entity Rating class Rating scale Rating Outlook
FBNQuest Merchant Bank Limited Long Term issuer National A-(NG) Stable
Short Term issuer National A2(NG)

Rating rationale

The ratings of FBNQuest Merchant Bank Limited (“FBNQ MB” or “the bank”) balance its adequate funding and liquidity position, intermediate capitalisation, modest competitive position, and good risk profile, albeit with a significant concentration by obligors.

FBNQ MB is a wholly owned subsidiary of FBN Holdings Plc (“the group”), one of the largest financial services group in Nigeria. Leveraging its membership of the group, and long track record (having evolved from a discount house with over two decades of operations), FBNQ MB has been able to consolidate its position within the Nigerian financial landscape. Specifically, the bank continues to harness inherent cross selling opportunities within the group to serve a wide range of customers and ultimately enhance its financial performance and market position. Reflective of its relatively small customer base and the trends across the merchant banking subsector, elevated concentration risk is perceived, with the 20 largest obligors constituting 96% of gross loans at FY20. Furthermore, the bank evidenced moderate market share within the Nigerian banking industry in terms of total assets, customer deposits, and loan portfolio, which are estimated at 0.4%, 0.3% and 0.3% respectively at FY20. Management & Governance is a neutral ratings factor, as it is in line with international best practices.

Capitalisation is a positive ratings factor, underpinned by the relatively sound GCR computed core capital ratio of 21.6% as at 31 August 2021 (FY20: 24.6%; FY19: 22.4%). Over the next 12-18 months we expect the core capital ratio to moderate to 19%-20% due to outpacing growth in risk weighted assets vis-à-vis internal capital generation.

Risk is viewed to be somewhat contained, with non-performing loans (“NPL”) ratio of 2.1% as at 31 August 2021(FY20: 2.6%; FY19: 3.0%) broadly comparable with the regulatory tolerable limit of 5%. Credit losses remained moderate, averaging 0.8% over the review period and stood at 0.3% as at 31 August 2021 (FY20: 0.6%). We expect the NPL ratio and credit losses to remain within a similar range over the next 12-18 months, as the gradual macroeconomic environment recovery is anticipated to forestall any significant credit migration. Positively, loan loss reserve coverage is adequate at approximately 100% over the review period. However, the loan book is considered highly concentrated, with the top 20 obligors accounting for 94.3% of the loan portfolio as at 31 August 2021 (FY20: 96%), albeit a common trend across Nigerian merchant banks. Limited foreign currency lending also benefits the bank’s risk position.

FBNQ MB’s funding and liquidity is assessed at an intermediate level. The bank is predominantly funded through customer deposits, which accounted for 65.9% of funding base at FY20. In line with trends across the merchant banking subsector, the bank’s deposit book largely titled towards the expensive term deposits, constituting a sizeable 99.5% of the deposit book at FY20. This notwithstanding, the relatively low interest environment saw average cost of funds moderate to 2% in FY20 from 10.5% in FY19. Cognisance is also taken of the bank’s propensity to mobilise deposits across the group, thereby providing some level of funding stability. Analysis of the deposit book reflects a somewhat diversified mix, with the 20 largest depositors constituting 40.5% of customers deposits at FY20. At FY20, the GCR liquid assets covered total wholesale funding strongly 2.9x, while the ratio of GCR liquid asset to total customer deposits stood at 53.3% (FY19: 29.2%).

Outlook statement

The stable outlook reflects GCR’s expectation that FBNQ MB’s asset quality metrics would remain within a sound range over the rating horizon, underpinned by gradual macroeconomic environment rebound, albeit with the loan portfolio concentration by obligor. GCR calculated capital ratio is anticipated to moderate to 19%-20% over the next 12-18 month, given our expectation that growth in risk weighted assets may outpace internal capital generation and continue to taper down capitalisation. We expect the bank to continue to benefit from cross selling opportunities within the group on a sustainable basis.

Rating triggers

The ratings could be upgraded if FBNQ MB materially improves its core earnings and achieves a core capital ratio of about 25% on a sustainable basis, while also maintaining sound asset quality metrics. In addition, GCR would positively consider a well-diversified loan portfolio and funding base. Conversely, a downward rating movement could be triggered by asset quality pressures and material deterioration in core capital ratio to below our forecasted range over the next 12-18 months.

Analytical contacts

Primary analyst Yinka Adeoti Financial Institutions Analyst
Lagos, NG Adeoti@GCRratings.com +234 1 904 9462
Committee chair Vinay Nagar Senior Financial Institutions Analyst
Johannesburg, ZA Vinay@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Financial Institutions, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, October 2021
GCR Financial Institutions Sector Risk Score, February 2021

Ratings history

FBNQuest Merchant Bank Limited

Rating class Review Rating scale Rating Outlook Date
Long Term issuer Initial National A(NG) Stable June 2006*
Short Term issuer Initial National A1(NG) June 2006*
Long Term issuer Last National A-(NG) Stable September 2020
Short Term issuer Last National A2(NG) September 2020

*Refers to ratings of Kakawa Discount House Limited

Risk score summary

Rating Components & Factors Risk Scores
Operating environment 7.25
Country risk score 3.75
Sector risk score 3.50
Business profile (1.50)
Competitive position (1.50)
Management and governance 0.00
Financial profile 1.50
Capital and Leverage 0.75
Risk 0.50
Funding and Liquidity 0.25
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 7.25

Glossary

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
Credit losses New loan loss provisions divided by average customer loans.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATING

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to FBNQuest Merchant Bank Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

FBNQuest Merchant Bank Limited participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from FBNQuest Merchant Bank Limited and other reliable third parties to accord the credit ratings included:

  • The audited financial results to 31 December 2020
  • Four years of comparative audited numbers
  • Management account as at 31 August 2021
  • Other related documents.


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