Announcements Financial Institutions Rating Alerts

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

Lagos Nigeria, 05 September 2019 — 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 2020.

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:

FBNQ MB enjoys 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.

FBNQ MB’s capitalisation evidenced a downward trend at FY18, with the shareholders’ funds declining for the second consecutive year by 10.6% to N23.5bn at year-end, largely impacted by loan loss provisions adjustment to retained earnings on the back of implementation of IFRS 9. The reduction in capital level, coupled with increased risk weighted assets saw the bank’s risk weighted capital adequacy ratio declined to 12.2% at FY18 (FY17: 13.5%) and stood at 13.4% at 1H FY19, albeit remaining above the regulatory minimum requirement of 10%. To support its funding base and enhance operations, management has indicated plans to issue debt capital in 3Q FY19.

Gross non-performing loan ratio increased slightly to 3.6% at FY18 (FY17: 3.2%), driven by contraction in the loan book at the balance sheet date. The bank’s total loan loss provision coverage of impaired loans of 107.4% at FY18 (FY17: 34.2%) is considered adequate.

Liquidity risk is considered low, given that a sizeable portion of the bank’s assets were held in cash and highly liquid risk-free government securities. Also, the regulatory liquidity ratio ranged between 36.7% and 69.6% throughout the year and averaged 53.7%, against the required minimum of 20% for the subsector. It is noteworthy that the bank raised a sum of N7.4bn through the issuance of four series of commercial papers during 4Q FY18, aimed at supporting liquidity profile and further augment working capital.

FBNQ MB reported a net profit after tax of N2.1bn in FY18, representing 49.6% year-on-year decline. While non-interest income expanded by 15.9% on account of growth in dividend and trading income during the year, the 41% decline in net-interest income saw total operating income end down to N10.1bn in FY18 (FY17: N12.1bn). Also, operating expenses grew by 10.3% to N7.3bn, resulting in escalated cost to income ratio of 72.8% in FY18 (FY17: 55.1%). Overall, the return on average equity and assets declined to 8.3% and 1.5% respectively at FY18, from 14.8% and 3.0% at FY17.

Upward rating adjustment may follow a substantial improvement in profitability and capitalisation metrics. However, a material deterioration in the bank’s competitive position, 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 (September 2018)
Long-term: A-(NG)
Short-term: A2(NG)
Rating outlook: Stable

*Refers to rating of Kakawa Discount House Limited.

ANALYTICAL CONTACTS

Analysts
Yinka Adeoti/Julius Adekeye
Credit Analyst/Senior Credit Analyst
adeoti@globalratings.net
adekeye@globalratings.net

Committee Chairperson
Dave King
king@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
FBNQ MB rating reports (2016-18)
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 2018 (plus three years of comparative numbers), latest internal and/or external audit report to management, most recent year-to-date management accounts to 30 June 2019, 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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