Fitch Rates Coronation Merchant Bank ‘B-‘; with Negative Outlook
Fitch Ratings has assigned Nigeria-based Coronation Merchant Bank Limited (CMB) a Long-Term Issuer Default Rating (IDR) of ‘B-‘ with a Negative Outlook, Viability Rating (VR) of ‘b-‘ and National Long-Term Rating of ‘BBB (nga)’.
According to Fitch, CMB’s viability rating (VR) reflects Nigeria’s (B/Negative) challenging and volatile operating environment, which influences its financial and non-financial rating factors.
“CMB’s company profile has a high influence on its ratings and reflects its niche and developing franchise, and structural funding and liquidity weaknesses, given its reliance on short-term wholesale deposits and market funding”, Fitch stated.
It said the negative outlook on CMB’s Long-Term IDR reflects the firm’s view that prevailing operating conditions create downside risks to its assessment of the bank’s funding and liquidity profile as well as pressure on asset quality and earnings, but there is a degree of tolerance in these factors.
Established in 2015, CMB is a leading independent merchant bank engaged in corporate and trade finance, domestic capital markets and investment banking.
Fitch explained that its assessment of CMB’s profile reflects its moderate size, niche focus, developing franchise and limited record of performance.
According to Fitch, management quality is a relative strength, with the senior team demonstrating a high degree of credibility, experience and depth commensurate with the complexity of the business.
It also noted that CMB’s strategy is well defined, although execution could be hampered under current difficult operating conditions, in Fitch’s view.
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CMB’s primary risk exposure is to short-term (up to one year) self-liquidating corporate loans and traditional trade finance and Nigerian treasury bills.
“This is balanced by CMB’s good management of credit and market risks. Operational risk is inherent in the business but losses are low”, the Rating firm said.
Fitch also recognised that CMB has good asset quality, reporting a zero impaired loans (IFRS 9 Stage 3)/gross ratio at end-1H20, which has also been the case for the last four financial years.
“This reflects the bank’s lower risk business model and risk management capability.
“Given the severity of the economic crisis, we expect a modest rise in Stage 2 and Stage 3 loans over the next 18 months.
“Asset quality risks are exacerbated by very high credit concentrations by borrower and significant foreign-currency-denominated trade loans (forming 60% of total loans at end-1H20)”, Fitch explained.
Meanwhile, Fitch reckoned that CMB remained profitable in 1H20, although operating income declined by 20%, reflecting a lower monetary policy rate, declining yields on government securities, substantially higher obligatory cash reserve requirements and a fall in trading income.
Earnings pressure was softened by a fall in cost of funding due to CMB diversifying its funding mix.
Fitch said it expects earnings pressures to persist in the next 12-18 months because of lower client activity and weak macroeconomic conditions.
Profitability will be further pressured by rising loan impairment charges, reflecting modest credit quality deterioration.
More so, Fitch said CMB is well-capitalised, reporting Tier 1 and total capital adequacy ratios of 16.6% and 17.2%, respectively, at end-1H20.
However, Fitch stated that capital ratios have modestly declined from end-2019 due to fast growth and currency devaluation. Fitch expects further modest capital pressure to come from lower earnings.
“Our assessment of capital also considers CMB’s small absolute capital base, which exposes the bank to even moderate capital eroding losses.
“Given its business model, in the event of capital pressure we believe that CMB could de-leverage its balance sheet, if needed”, the Rating firm stated.
CMB’s funding structure is a relative rating weakness as the bank is funded entirely by price and confidence sensitive wholesale funding, including corporate deposits, short-term bank borrowings and commercial paper.
Around 37% of CMB’s non-equity funding was in foreign currency at end-1H20, Fitch Ratings noted.
The firm stated that corporate deposits are highly concentrated by name and around 17% were in foreign currency at end-1H20.
Given the nature of its trade finance business, Fitch said the bank has a reliance on short-term foreign currency funding (around 25% of its total foreign currency funding), which could decline if sovereign risks rise, leading to pressure on foreign currency liquidity.
“Balance sheet liquidity is underpinned by the short-term nature of the bank’s trade finance assets and large holdings of liquid assets.
The bank is highly liquid in local currency but conversion to foreign currency is challenging under current market conditions”, Fitch stated in the report.
SUPPORT RATINGS AND SUPPORT RATING FLOOR
Fitch believes that sovereign support to CMB cannot be relied on, given Nigeria’s weak ability to provide support, particularly in foreign currency.
Therefore, the Support Rating Floor (SRF) of all Nigerian banks is ‘No Floor’ and their Support Ratings (SRs) are ‘5’.
Fitch said this reflects its view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.
Explaining factors that could, individually or collectively, lead to positive rating action/upgrade, it stated that upside for ratings is currently limited given difficult operating conditions and risks to funding and liquidity due to market volatility, as reflected in the negative outlook.
Fitch Rates Coronation Merchant Bank ‘B-‘; with Negative Outlook
