Lagos, 30 June 2021 – GCR Ratings (“GCR”) has upgraded the national scale long and short-term ratings assigned to Rand Merchant Bank Nigeria Limited to AA-(NG) and A1+(NG) respectively, with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook|
|Rand Merchant Bank Nigeria Limited||Long Term issuer||National||AA-(NG)||Stable|
|Short Term issuer||National||A1+(NG)|
The rating upgrade is underpinned by Rand Merchant Bank Nigeria Limited’s (“RMBN” or “the bank”) strong capitalisation, adequate funding and liquidity, and sound risk position characterised by nil non-performing loans (“NPL”) since inception to date. Further supporting the rating is the robust financial and technical support from its parent, FirstRand Group (“FirstRand” or “the Group”), one of the leading financial services group in Africa.
RMBN is a wholly owned subsidiary of FirstRand. Leveraging its membership of the Group, the bank has continued to harness the financial strength and global reach of the Group to support its corporate clients along the international trade value chains. Positively, the evolution of the bank’s fully owned subsidiary (RMB Nigeria Nominees Limited), which was incorporated in January 2019, provided additional impetus for service/product diversification and earnings accretions. However, these strengths are counterbalanced by the bank’s moderate market share within the Nigerian banking industry in terms of total assets, customer deposits, and loan portfolio, which are estimated at 0.4%, 0.2% and 0.2% respectively at FY20. Management & Governance is a neutral ratings factor.
RMBN’s strong capitalisation is a key rating strength, with capital adequacy ratio (“CAR”) consistently exceeding the regulatory threshold by a significant margin. As at FY20, CAR was robust at 47.5% (FY19: 50.1%), relative to the regulatory minimum of 10%, thus providing adequate headroom for loss absorption. Similarly, GCR’s computed core capital ratio stood at 40.9% at FY20 (FY19: 50.2%) and expected to remain within strong range over the next 12-18 months on the back of the bank’s solid internal capital generation and cautious risk asset growth. However, earnings quality is a ratings constraint, reflected by revenue stability risk characterised by high source concentration and a material exposure to market sensitive income, which has historically constituted over 40% of total operating revenue. That said, we expect the bank’s increased value proposition, and operational scale expansion to further support earnings diversification and accretion over the short to medium term.
RMBN’s risk position is sound and well contained, as evidenced by the nil NPL recorded since inception till date. Credit losses have also remained moderate at 0.6% at FY20 and broadly compared favourably with the industry average of c.2%. Conversely, loan book concentration is assessed at an elevated level, with the twenty largest obligors constituting 99.7% of the loan portfolio at FY20. While loan concentration is typical of merchant banks in Nigeria, management anticipates a somewhat diversified loan portfolio over the short to medium term on the back of its recent loan book expansion strategy. GCR is also cognisant of the bank’s significant exposures to market risk in view of the substantial market sensitive income realised in FY20.
The bank’s funding structure is adequate, with the GCR long term funding ratio and stable funding ratio registered at 98.8% and 74% respectively at FY20. Customer deposits increased by 14.4% at FY20, largely driven by the bank’s improved low-cost deposits mobilisation capacity via its transactional banking platform, as well as leveraging partnerships with fintechs. As a result, the relatively cheaper current deposits constituted a higher 52.8% of customer deposits at FY20 (FY19: 18.7%), thereby leading to 420bps moderation in cost of funds to 4% at FY20. Analysis of the deposits book reflects high concentration risk, with the twenty largest depositors constituting 86.8% of customer deposits at FY20. Positively, the bank’s liquidity position remains strong, with the regulatory liquidity ratio of 130% at FY20 relative to the regulatory minimum of 20%. Going forward, we expect the bank’s liquidity metrics to remain strong on the back of its highly liquid balance sheet.
The national scale Issuer ratings benefit from parental support. The bank is wholly owned by FirstRand, which is headquartered in South Africa, delivering finance solutions across nine key African countries, the United Kingdom and India. We believe FirstRand has the capacity to support the bank based on its sound financial profile and good geographic diversification.
The stable outlook reflects GCR’s expectation that RMBN’s capitalisation metrics would remain strong on the back of its good internal capital generation and cautious risk asset creation. Asset quality metrics are anticipated to be maintained at sound levels, albeit with the loan portfolio concentration by obligor remaining high. We also believe funding and liquidity will remain stable and adequate.
The rating could be upgraded if RMBN maintains capitalisation and asset quality metrics at strong levels on a sustainable basis and achieves loan book diversification. Conversely, a downward rating movement could be triggered by material deterioration in capitalisation and asset quality metrics.
|Primary analyst||Yinka Adeoti||Financial Institutions Analyst|
|Lagos, NG||Adeoti@GCRratings.com||+2341 904 9462|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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, February 2021|
|GCR Financial Institutions Sector Risk Score, February 2021|
Rand Merchant Bank Nigeria Limited
Risk score summary
|Rating Components & Factors||Risk Scores|
|Country risk score||3.75|
|Sector risk score||3.50|
|Management and governance||0.00|
|Capital and Leverage||3.00|
|Funding and Liquidity||0.00|
|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.|
|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 Rand Merchant Bank Nigeria 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.
Rand Merchant Bank Nigeria 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 Rand Merchant Bank Nigeria 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 March 2021
- Other related documents.