Fitch Upgrades Coronation Merchant Bank as Funding Risks Recede
Global credit rating agency, Fitch, has upgraded Coronation Merchant Bank Limited’s (CMB) Long-Term Issuer Default Rating (IDR) to ‘B-‘ from ‘CC’, as well as its Viability Rating (VR) to ‘b-‘ from ‘cc’.
The global rating agency has also raised CMB’s National Long-Term Rating to ‘BBB-(nga)’ from ‘B+ (nga)’. According to the rating note, the outlook for the Long-Term IDR and National Long-Term Rating is stable.
The rating note added that the upgrades reflect a strong improvement in the bank’s capital position following the completion of a rights issue and sale of foreign-currency (FC)-denominated equity investments.
“The upgrade also reflects our view that funding instability risks have receded due to the strengthening of capitalisation, and an improvement in CMB’s core profitability following significant softening of the cash reserve ratio (CRR) regime for merchant banks”, Fitch stated.
CMB’s IDR is driven by its standalone creditworthiness, as expressed by its viability rating of ‘b-‘, Fitch said in the rating note.
It also added that the viability rating balances the concentration of Coronation Merchant Bank’s operations in Nigeria’s challenging operating environment, a niche franchise and business model.
The viability rating also balances the bank’s high credit concentrations, moderate capitalisation and reliance on short-term wholesale funding against good asset-quality metrics.
CMB’s national ratings are at the lower end of Nigeria’s national scale, reflecting its niche franchise, high credit concentrations, moderate capitalisation and reliance on wholesale funding.
Fitch said CMB has a small franchise, representing just 0.4% of domestic banking-sector assets in 2023.
The rating note stated that the bank’s merchant-banking business model has been more sensitive to Nigeria’s high cash reserve ratio regime and hard currency shortages in recent years than commercial banks, resulting in a significant weakening in its financial profile in 2022 and 2023.
However, Fitch views the material reduction in the cash reserve ratio applicable to merchant banks and the improvement in FX market turnover under the new Central Bank of Nigeria (CBN) leadership as major positive developments for CMB.
The global rating agency considered Coronation Merchant Bank’s single-obligor credit concentration high, with the 20 largest loans representing 4.2x Fitch Core Capital (FCC) in Q1-2024.
However, credit risks are mitigated by a focus on short-term trade-finance transactions, which dominate the loan book, according to the rating note.
Despite challenging macro-economic conditions, Coronation Merchant Bank has recorded no impaired loans since converting to a merchant bank in 2015, reflecting its prudent underwriting standards and risk controls, and the lower-risk nature of its trade-finance loans.
The merchant lender recorded a large net loss in 2022, equivalent to 3.7% of risk-weighted assets (RWAs), driven by a negative net interest margin (NIM) caused by large unremunerated CRR-related assets.
Net interest margin remained negative in 2023 (-1.9%), but operating returns increased to 1.3% of RWAs due to one-off fee income and gains resulting from the sale of equity investments.
The CBN released the majority of cash reserves ratio-related assets in April 2024, and Fitch expects this to drive a positive net interest margin and improved profitability in the year.
At the end of May, 2024 Coronation Merchant Bank capital adequacy ratio (CAR) improved to 11.1% (excluding unaudited profits) after an estimated breach in Q4-2023.
The improvement in capital adequacy ratio stems from N8.4 billion rights issue, the sale of equity investments and reduction in risk weighted assets, as per Fitch note.
Nevertheless, the rating note stated that buffers are modest in respect of sensitivity to a further depreciation of the naira. Fitch expects capital to strengthen further in the medium term, with CMB planning a larger rights issue by the end of 2025 to comply with its new paid-in capital requirement. #Fitch Upgrades Coronation Merchant Bank as Funding Risks Recede
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