GCR confirms Coronation Merchant Bank Limited’s long-term and short-term issuer ratings nationwide of A- (NG) / A2 (NG); Outlook stable

GCR Ratings (“GCR”) has confirmed the long-term and short-term ratings of Coronation Merchant Bank Limited nationwide of A-_(NG) and A2_(NG) respectively, with a stable outlook.

Coronation Merchant Bank Limited (“Coronation MB” or “the Bank”) ratings reflect its funding and adequate liquidity position, as well as strong measures of asset quality, as evidenced by non-performing loans (“NPL”). ) zero since its inception to date. However, these strengths are partially offset by the modest competitive position of the bank, the high concentration of the loan portfolio and the heavy reliance on wholesale funding from financial institutions.

Coronation MB is a significant player in the Nigerian merchant banking sub-sector due to its product / service delivery, loan portfolio and deposit-raising capacity compared to its peers. Drawing on its long experience (having previously operated as a discount house for more than two decades) and its partnerships, the bank guarantees a constant improvement of its operational scale, especially in the area of ​​trade finance. Given its relatively small customer base and the trends observed in the merchant banking sub-sector, a high concentration risk is perceived, with the twenty largest debtors and depositors representing respectively 85.0% and 75.4% of gross loans and customer deposits in fiscal year 20. In addition, the bank had a moderate market share in the Nigerian banking sector in terms of total assets, customer deposits and loan portfolio. , which are estimated at 0.8%, 0.7% and 0.7% respectively for fiscal year 20. Management and governance are a neutral rating factor.

Capitalization is assessed at an intermediate level. GCR’s calculated capital ratio stood at 17.6% in FY20 (FY19: 19.8%) and is expected to moderate to 16% to 17% over the next 12-18 months. given the superior growth of risk-weighted assets versus internal capital generation. Profit quality is considered negative, reflected by the risk of income stability characterized by high concentration of sources and significant exposure to market sensitive income, which accounted for 42.5% of total operating income during year 20 (year 19: 41.3%).

The risk position is strong and a key rating strength, supported by the bank’s zero NPL since inception to date and moderate 0.2% credit losses during FY20, which compare favorably overall the industry average of about 3%. Early assessments of the potential impact of the COVID-19 pandemic have indicated that the bank will not be immune to industry challenges, including asset quality issues and slower loan repayments. However, this impact has so far been minimal as the bank made no recourse to regulatory forbearance during the period. That said, we expect bad debts and credit losses to remain in a similar high range over the rating horizon thanks to the maintenance of strict underwriting criteria and the recovery of the macroeconomic environment. Conversely, the loan portfolio is considered highly concentrated, with the top twenty debtors accounting for 85% of the loan portfolio in FY20. Although this is a rating limiting factor and typical investment banks in Nigeria, management expects this concentration to moderate somewhat in the short to medium term due to the recent expansion of sector coverage. GCR is also aware of the bank’s significant market risk exposures given the substantial market-sensitive income earned in fiscal year 20.

Coronation MB’s funding base is considered adequate, mainly bolstered by the first naira 25 billion unsecured subordinated bonds issued in 2020, as well as by improving its deposit-raising capacity. As a result, GCR’s long-term funding ratio and stable funding ratio were robust at 80.8% and 73.1% respectively in FY20. If we take into account the significant growth (41.3%) in customer deposits during fiscal year 20, the concentration risk is obvious, with the top twenty depositors representing 75.4% of the deposit portfolio, most of which came from financial institutions. Positively, the liquidity position is strong, with GCR’s liquid assets covering wholesale funding and customer deposits respectively by 3.9x and 53.1% during FY20.

The stable outlook reflects GCR’s expectations that Coronation MB’s asset quality metrics will remain strong despite tensions in the operating environment, although the concentration of the loan portfolio by obligor remains high. GCR’s calculated capital ratio is expected to moderate to 16-17% over the next 12-18 months, as we expect the superior growth of risk-weighted assets relative to capital generation. internal continues to weigh on capitalization measures. However, GCR will positively view a significant improvement in core earnings over the rating horizon. While we expect liquidity to remain strong, diversifying the deposit portfolio with a better mix of clients from non-financial institutions would be viewed positively.

Ratings could be upgraded if Coronation MB significantly improves its core earnings and achieves a core capital ratio above 20% on a sustainable basis, while maintaining strong asset quality metrics. In addition, GCR would positively consider a well-diversified loan portfolio and funding base. Conversely, a downward rating movement could be triggered by a significant deterioration in the calculated capital ratio GCR to less than 15%, pressures on asset quality and increased dependence on the financing of wholesale financial institutions.