Announcements Financial Institutions Rating Alerts

GCR Affirms Nova Merchant Bank Limited’s National Scale Rating of BBB-(NG); Outlook: Stable

Lagos Nigeria, 23 April 2020 — Global Credit Ratings has affirmed the national scale ratings assigned to Nova Merchant Bank Limited of BBB-(NG) and A3(NG) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until March 2021.

SUMMARY RATING RATIONALE

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

The ratings reflect Nova’s evolving status and its limited track record of less than three years. While GCR takes cognisance of the bank’s relatively improved financial performance and progress with the implementation of its strategic plan, the accorded ratings are however constrained by the current challenging macroeconomic environment and uncertainties in the Nigerian banking regulatory landscape.

Nova’s capitalisation is considered adequate for its current risk level and regulatory requirement. Shareholders’ funds grew by 11.1% to N19.6bn at FY19, underpinned by internal capital generation. Accelerated growth in risk-weighted assets saw the bank’s risk-weighted capital adequacy ratio (“CAR”) moderate to 54.3% at FY19 (FY18: 228.7%), albeit headroom for further expansion in risk asset base remained strong based on the regulatory minimum CAR of 10%. As such, GCR expects the bank’s CAR to moderate further as lending activities are intensified.

The bank displayed a sound liquidity profile at FY19, with key liquidity metrics comparing favourably with regulatory requirements. Specifically, statutory liquidity ratio ranged from 55.8% to 200.4% throughout FY19, against the regulatory minimum of 20%. Furthermore, the contractual matching of the bank’s assets and liabilities maturities at the balance sheet date reflects liquidity buffer across all maturity bands, with cumulative liquidity buffer amounting to N18.7bn at FY19.

Nova’s asset quality metrics remained strong, with nil non-performing loans recorded from inception to date. Cognisance is taken of the fact that the bank recently began to build up its loan book, albeit total loan exposures remain minimal relative to peers.

The bank’s key profitability indicator improved in FY19, with pre-tax profit increasing by a sizeable 57.9% to N1.5bn, underpinned by rapid growth in loan book as well as increased non-interest income. While operating expenses rose by 32.3%, an outpaced growth (45.9%) in total operating income, saw the cost to income ratio decline to 54.1% in FY19 (FY18: 59.6%). Overall, return on average equity strengthened to 8.9% (FY18: 6.7%), while return on average assets declined to 3.8% (FY18: 5.4%) due to a firmer growth in total assets.

Satisfactory implementation of the outlined strategic plan, with evident record of significant improvement in bank’s competitive position, as well as established and sustained track record (capitalisation, profitability and asset quality). However, the inability of management to successfully execute the unveiled strategic plan, sustained weak competitive position, as well as material deterioration in key performance metrics (financial, capitalisation, asset quality, and liquidity metrics), may result in a negative rating action.

NATIONAL SCALE RATINGS HISTORY

Initial/ last rating (April 2019)

Long term: BBB-(NG)

Short term: A3(NG)

Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst

Yinka Adeoti

Credit Analyst

adeoti@globalratings.net

+234 1 904 9462-3

Committee Chairperson

Dave King

king@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

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

Glossary of Terms/Ratios, February 2016

Nova rating report (2019)

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 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, Nova Merchant Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.

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

The information received from Nova Merchant Bank Limited to accord the credit rating included the latest audited annual financial statements as at 31 December 2019 (plus a year and eight months of comparative numbers), latest internal and/or external audit report to management, full year detailed budgeted financial statements for 2020 and the bank’s five-year strategic plan. 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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