GCR Downgrades FSDH Merchant Bank as Capital Moderates
While the outlook is accorded as stable, GCR Ratings has downgraded FSDH Merchant Bank Limited’s national scale long-term issuer rating to BBB+ (NG) and affirms the short-term issuer rating of A2 (NG).
The emerging market-focused rating firm also downgraded the national scale long-term issue ratings of FSDH Funding special purpose vehicle (SPV) Plc.’s Series 1 Tranche A and Tranche B Bonds to BBB (NG) and BBB+ (NG) respectively.
GCR said it considers FSDH Merchant Bank Limited a core operating entity to FSDH Holding Company Limited, as such, the national scale issuer credit ratings on the bank reflect the strengths and weaknesses of the Group.
It added that a one-notch rating downgrade reflects the sizable moderation in FSDH Merchant Bank’s capitalisation metrics, which has had a significant impact on our assessment of the bank’s credit profile.
GCR noted that FSDH Merchant Bank has grown strongly into its capital over the last 12 months, due to an acceleration in loan growth which surpassed the bank’s budget projections and prior years of conservative risk asset growth, as well as outstripping internal capital generation.
It said the merchant banker’s capital adequacy ratio declined sharply, from 31.0% in December 2020 to 20.0% as of December 2021.
GCR hints that its computed core capital ratio for the Group deteriorated from the high range of 37.4% as of December 2020 to the intermediate range of our assessment, to register at 20.8% as of December 2021.
“The dip was largely driven by the strong growth in risk-weighted assets, having registered a 54.3% year-on-year growth in RWA relative to internal capital generation growth of 3.5% over the period”.
As of September 2022, RWA moderated by 14.9%, due to the write-off of the bank’s major non-performing loan and relatively strong collateralization of the newly originated loans, which has supported capitalisation ratios.
“In the near term, we expect GCR core capital ratio for the Group to register within the 25%+ range, supported by the projected rebound in earnings and cautious RWA growth”, GCR said.
However, the relatively high contribution of market-sensitive income to the earnings profile and foreign currency exposures present downside risks to capitalisation, given the challenging operating environment, it stated.
The rating note said FSDH Merchant Bank’s competitive position reflects its growing franchise strength and potential for diversification as the Group continues to implement its strategic growth aspirations in both the banking and non-banking financial service segments.
“The bank has a long-standing position and compares well to merchant banking peers in the market”.
Over the past year, FSDH has demonstrated its increased competitiveness through the strong growth recorded, with a fast-growing client base comprising some of the top corporate and mid-sized industry players, GCR said.
According to the rating note, the bank’s risk position has shown some improvement over the past year. It is noted that credit losses moderated from the high of 2.4% recorded in FY2020 to 0.5% in FY2021.
Similarly, the merchant bank non-performing loans ratio also moderated to 4.7% from 5.6% over the period, albeit largely driven by strong loan growth. READ: Banks Non-Performing Loans Ratio Moderates as CBN Debits Rise
As of September 2022, GCR stated that the NPL ratio improved to 1.7% on account of the write-off of the bank’s major NPL, an industry-wide exposure in the telecommunication industry for which the bank made full provisions in FY2021.
The rating said counterparty concentrations also improved, with the top twenty exposures contributing 83.9% to gross loans as of December 2021 compared to 98.8% recorded in December 2020.
FCY loans contributed a significant 37.4% to gross loans as of December 2021 as against 40.5% in 2020, albeit balanced by the fact that foreign currency loans are granted to mainly to obligors with foreign currency receivables, thereby providing some level of natural hedge.
Notwithstanding, GCR said it takes cognisant of the potential seasoning of the loan portfolio, as the newly originated loans mature. The bank grew its loan book by a high of 37.1% as of 9M-2022 compared with 96.1% in 2021 and 13.8% reported a year before.
“This may subsequently result in a weakening of the risk metrics, especially given the uncertain and stressed macroeconomic outlook. Also, market risk is of key concern, given the highly volatile interest rate environment.
“A sizable portion of the bank’s securities portfolio comprises available-for-sale instruments, which are susceptible to potentially steep revaluation losses with an attendant impact on earnings and capitalisation”.
FSDH Merchant Bank funding and liquidity assessment are slightly positive to the ratings, according to GCR. Core customer deposits as a proportion of the funding base dipped to 47.9% as of December 2021 from 63.7% as of December 2020, albeit improving marginally to 54.5% as of 9M-2022.
GCR considers the bank’s local currency liquidity sufficient, noting liquid assets coverage of wholesale funding and customer deposits registering at 1.4x and 63.3% respectively, as at 9M-2022.
The stable outlook reflects an expectation that FSDH will maintain a positive earnings trajectory such that the GCR core capital ratio for the Group registers at the projected level of over 25% in the next 12-18 months while maintaining its relatively low credit losses and NPLs.
FSDH’s demonstrated good market access is expected to support the bank’s foreign currency funding base, thereby averting foreign currency liquidity issues in the near term. #GCR Downgrades FSDH Merchant Bank as Capital Moderates
