Lagos Nigeria, 03 October 2018–Global Credit Ratings has affirmed the national scale ratings assigned to FSDH Merchant Bank Limited of A-(NG) and A2(NG) in the long and short term respectively; with the outlook accorded as Stable. The ratings are valid until September 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to FSDH Merchant Bank Limited (“FSDH” or “the bank”) based on the following key criteria:
FSDH maintained a strong market position in the merchant banking subsector, underpinned by the relatively long track record of the brand of over two decades. The accorded ratings are supported by adequate capitalisation, material improvement in profitability, and good liquidity. However, of major concern is the weak asset quality which may impact the ratings should the pressure persist and consequently earnings.
Capital of N29.0bn at FY17 is considered adequate for current level of operation. Shareholders’ funds grew 26.9% on the back of FSDH’s internal capital generating capacity. Similarly, capital adequacy ratio improved to 29.6% from 24.8% at FY16, against the regulatory minimum of 10% for merchant banks.
Key performance metrics improved in FY17 as pre-tax profit closed the year at N3.9bn, representing 30.9% growth from FY16 level. While net interest income grew significantly by 105.3% during the period, driven by the high yield on T-bills, non-interest income was up moderately by 8.0%, resulting in a 56.9% increase at the total operating income level. However, a significant four-fold increase in impairment charge to N2.3bn, couple with 31.8% rise in operating expenses constrained growth at the pre-tax level. Despite the foregoing, cost to income ratio improved to 42.3% (FY16: 50.2%) underpinned by the growth at the operating income level. Consequently, return on average equity and assets improved to 14.2% and 2.8% respectively, from 11.8% and 2.4% in FY16.
The gross non-performing loans (“NPLs”) increased significantly to N5.5bn from N759m in FY16, largely impacted by an exposure to one of the top players in the telecommunication sector. The exposure was a secured syndicated loan granted in 2013 and steps are currently being taken to repossess the security. As a result, the gross NPL ratio rose to 13.4% from 2.1% in FY16. Also, specific provision coverage of impaired loans stood at 39.1% at FY17 (FY16: 16.4%).
Liquidity is supported by more allocation of capital to treasury securities and other low risk cash funds. The regulatory liquidity ratio closed the year at 120.5% at FY17 (FY16: 93%), against the required minimum of 20% for the subsector. Also, cash and tradable assets to short term funding stood at 87.8% (FY16: 70.9%) comparing favourably with peers, while risk-free government securities accounted for 39.9% of the bank’s asset pool at FY17. Furthermore, cognisance is taken of the fact that, FSDH Issued commercial papers on the FMDQ OTC exchange which totalled N12.7bn at FY17 and provided support to the bank’s funding base during the period.
Performance at 1H FY18 lags budget on annualised basis and below that of same period in FY17. However, management remained hopeful of achieving the set budget to be driven by income from new mandates secured in 2H FY18.
An upward movement in the ratings may follow a sustained improvement in profitability and efficiency metrics, while capitalisation and liquidity remained at strong levels. However, a downward movement in the ratings may follow a further weakening in asset quality metrics and decline in profitability which impacts the bank’s capital.
NATIONAL SCALE RATINGS HISTORY
Initial rating (October 2000)*
Long term: A(NG)
Short term: A1(NG)
Last rating (September 2016)
Long term: A- (NG)
Short term: A2(NG)
*Refers to FSDH Discount House.
Senior Credit Analyst
+234 1 462 2545
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for rating Banks and Other Financial Institutions, updated March 2017
Glossary of Terms/Ratios, February 2016
FSDH rating reports (2000-17)
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, FSDH Merchant Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.
FSDH 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 FSDH Merchant Bank Limited with no contestation of/changes to the ratings.
The information received from FSDH Merchant Bank Limited and other reliable third parties to accord the credit ratings included the latest audited annual financial statements as at 31 December 2017 (plus four years of comparative numbers), latest internal and/or external report to management, full year 2017 detailed budgeted financial statements, year-to-date audited accounts to 30 June 2018, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.