Announcements Financial Institutions Rating Alerts

GCR Affirms FBNQuest Merchant Bank Limited’s rating of A-(NG); Outlook Stable

Lagos Nigeria, 02 October 2020 — Global Credit Ratings has affirmed the national scale ratings assigned to FBNQuest Merchant Bank Limited of A-(NG) and A2(NG) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until August 2021.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to FBNQuest Merchant Bank Limited (“FBNQ MB” or “the bank”) based on the following key criteria:

The accorded ratings reflect FBNQ MB’s strong brand acceptance in Nigeria, underpinned by its status as a subsidiary of FBN Holding Plc, as well as its established track record during its discount house operations. Also, cognisance is taken of the elevated risk in the operating environment, aggravated by the macroeconomic challenges and uncertainties arising from the COVID-19 pandemic.

FBNQ MB remains adequately capitalised for its current risk level. Shareholders’ funds grew by 18.7% to N28bn at FY19, bolstered by internal capital generation. Consequently, the risk-weighted capital adequacy ratio improved to 17.7% at FY19 (FY18: 12.1%) and stood at 16.9% at 7M FY20, well above the regulatory minimum of 10% for merchant banks. Management plans to raise qualifying tier 2 capital in 4Q FY20 is considered positive.

Although gross non-performing loan ratio moderated to 3.0% at FY19 (FY18: 3.6%) and further to 2.7% at 7M FY20, this was mainly aided by loan book expansion. Provisioning level is considered satisfactory, with total loan loss provision coverage of impaired loans of 110.6% at FY19 (FY18: 107.4%).

Liquidity risk appears low based on the bank’s strong liquidity metrics, closing FY19 with a regulatory liquidity ratio of 37.7% (FY18: 59.7%), well above the statutory minimum of 20% for the subsector.

FBNQ MB reported a net profit after tax of N2.6bn in FY19, representing a sizeable 28.3% year-on-year growth. While net-interest income declined by 16.8% due to the low interest rate environment, this was counter-balanced by a 10.5% growth in non-interest income, thus, total operating income ended relatively flat at N10bn. Performance at the pre-tax level was further supported by a significant 74.6% moderation in impairment charge and cost curtailment measures. Consequently, return on average equity and assets improved to 10.3% and 1.9% in FY19 (FY18: 8.3% and 1.5%) respectively.

Performance as at 31 July 2020 reflects a significant improvement from the comparative period in FY19 and was well above the full year projection on annualised basis. A pre-tax profit of N3.5bn was recorded in 7M FY20, representing 142.6% of 2020 budget on annualised basis.

Upward rating adjustment may follow sustained improvement in profitability and capitalisation metrics as well as significantly enhanced competitive position. However, a material deterioration in the bank’s capital adequacy, liquidity, profitability and asset quality metrics, could see the ratings come under pressure.

NATIONAL SCALE RATINGS HISTORY

Initial rating (June 2006)*

Long-term: A(NG)

Short-term: A1(NG)

Rating outlook: Stable

Last rating (August 2019)

Long-term: A-(NG)

Short-term: A2(NG)

Rating outlook: Stable

*Refers to rating of Kakawa Discount House Limited.

ANALYTICAL CONTACTS

Primary Analyst

Yinka Adeoti

Credit Analyst

adeoti@gcrratings.com

Committee Chairperson

Dave King

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017

FBNQ MB rating reports (2016-19)

Kakawa rating reports (2006-15)

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT WWW.GLOBALRATINGS.COM.NG

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings 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, FBNQuest Merchant Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.

FBNQuest 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 FBNQuest Merchant Bank Limited with no contestation of/changes to the ratings.

The information received from FBNQuest Merchant Bank Limited and other reliable third parties to accord the credit rating included the latest audited annual financial statements as at 31 December 2019 (plus four years of comparative numbers), latest internal and/or external audit report to management, most recent year-to-date management accounts to 31 July 2020, full year detailed budgeted financial statements for 2020, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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