GCR Downgrades Coronation Merchant Bank Outlook to Negative
While GCR Ratings affirmed Coronation Merchant Bank Limited’s national scale long and short-term issuer ratings of A-(NG) and A2(NG) respectively, the emerging market rating firm downgrades the company outlook to negative from stable amidst pressures in operating environment and internal capital generation.
In a rating note, GCR said the negative outlook on Coronation Merchant Bank Limited reflects the moderation in capital relative to its expectations, and sustained profitability pressure due to the adverse impact of the Central Bank of Nigeria’s cash reserve ratio policy, and significant reliance on highly volatile market sensitive income.
However, these downsides were balanced by the bank’s strong position within the merchant banking subsector and sound risk position, as characterised by zero non-performing loans and minimal credit losses/cost of risk since inception, according to the rating note.
For Coronation Merchant Bank, GCR said capitalisation is a negative ratings factor, given the pressures on GCR’s computed core capital ratio, which evidenced a downward trend over the review period.
At the end of the financial year 2021, the GCR core capital ratio declined to 15.2% from 16.9% in 2020 and 20.4% in 2019 due to the rapid growth in risk-weighted assets relative to internal capital generation and is expected to range between 14%-15% over the next 12-18 months.
The company’s pre-tax profit dipped by 51.6% in 2021, which GCR analysts think is reflective of the sustained margin compression stemming from the sharp rise in the zero-earning restricted deposits (CRR) with the Central Bank of Nigeria.
“While GCR took cognisance of the bank’s concerted efforts at addressing these concerns through further diversification of the funding base, margin pressure might persist over the outlook horizon”.
The rating note explained that Coronation Merchant Bank’s earnings quality is viewed negatively, given the material exposure to highly volatile market-sensitive income, which constituted a sizeable 68.8% of total operating revenue in 2021 from 42.5% a year earlier.
With its small customer base, the merchant bank has a relatively high loan concentration, according to the rating note. This poses risk to earnings as the twenty largest obligors constituting 78.7% of gross loans at the end of the financial year 2021.
In addition, GCR said Coronation Merchant Bank evidenced modest market share within the Nigerian banking industry in terms of total assets, customer deposits, and loan portfolio, which stood below 1% respectively as of 31 December 2021 and typical of Nigerian merchant banks.
The rating note revealed that the merchant bank has zero non-performing loans since inception and moderate costs of risk at 0.4% in 2021, from 0.2% in the comparable period in 2020, reflecting a healthy risk position.
Going forward, GCR said it expects the bank’s asset quality metrics – NPL and credit losses- to remain at a similar strong range on the back of sustenance of stringent underwriting criteria.
“Although concentration risk is evidenced in the loan portfolio, consideration is taken of moderation in the top twenty obligors to 78.7% of the loan book at FY21 versus 85% at 2020”. READ: Vetiva Downgrades UBA Plc.’s Estimates over Core Earnings Pressure
GCR emphasised that while loan book concentration is typical of Nigerian merchant banks, further diversification is envisaged over the short to medium-term on account of the recent sectoral coverage expansion.
On funding, the merchant bank funding structure is predominantly made up of customer deposits, GCR said in the rating note, albeit at a lower 57.1% of the funding base in 2021 compared to 69.4% in 2020.
The bank’s customer deposits declined by 9.1% during the year, following the bank’s effort at diversifying its funding base and improve the elevated cost of funds of 10% in 2021 versus 5.8% in 2020.
As a result, GCR said the merchant bank issued NGN71 billion commercial paper and secured a N8.4 billion short-term facility from International Financial Corporation in 2020.
Positively, the rating note said Coronation Merchant Bank deposit book concentration improved significantly, with the top twenty depositors constituting a lower 26.1% of the deposit pool in 2021 versus 75.4% in 2020.
However, GCR liquid asset coverage of wholesale funding moderated to 1.1x in the period relative to 3.9x in 2020, following the sizeable growth in borrowings during the year.
According to the rating firm, the negative outlook placed on Coronation Merchant Bank’s operation reflects the pressures on GCR’s calculated core capital ratio, which is anticipated to range between 14-15% over the next 12-18 months as analysts expressed belief the growth in RWA may continue to outpace internal capital generation.
However, GCR will positively consider a material improvement in core earnings and a well-diversified revenue base with reduced reliance on the highly volatile market-sensitive income over the rating horizon.#GCR Downgrades Coronation Merchant Bank Outlook to Negative
