GCR Keeps FBNQuest Merchant Bank on Rating Watch Negative
African-focused rating agency GCR has affirmed FBNQuest Merchant Bank Limited’s national scale long- and short-term issuer ratings of BBB (NG) and A3 (NG), respectively, with the outlook maintained as Rating Watch Negative.
According to the rating note, the affirmed ratings balance FBNQuest Merchant Bank Limited’s good risk profile, stable funding, and strong liquidity against a modest competitive position, as well as a low capitalisation assessment.
In its report, GCR said the negative ratings watch reflects potential non-applicability of group support uplift upon the completion of FBN Holdings Plc’s divestment from the bank.
“As a wholly owned subsidiary of FBN Holdings, FBNQuest MB’s ratings are supported by the credit profile of the group. Consequently, a group support uplift may no longer be applicable upon ownership change”, the rating note highlighted.
FBNQuest Merchant Bank’s competitive position is limited by its low market share within the Nigerian banking sector, which registers below 1%, GCR stated.
The ratings firm explained that the bank’s position within the merchant banking sub-sector is good, evidenced by its market share of loans, deposits, and total assets, which registered at 19.2%, 27.2%, and 18.2% as of 31 December 2023.
Additionally, FBNQuest Merchant Bank’s franchise strength is supported by its membership in FBN Holdings, a diversified financial services group that houses the fourth-largest commercial bank in Nigeria by assets.
“This creates cross-selling opportunities and operational efficiencies that have provided competitive advantages and supported growth.
“Looking ahead, our assessment of the bank’s competitive position will depend on the bank’s ability to defend its market share and position within the Nigerian merchant banking sub-sector following the exit from the group”, GCR said.
The ratings analysts explained that the merchant bank’s capitalisation remains a ratings constraint due to the impact of naira devaluation on risk-weighted assets. Positively, the bank’s GCR core capital ratio improved to 15.5% as of 31 December 2024 from 9.3% in August 2024 on account of earnings accretion during the year.
GCR said nevertheless, the bank’s capitalisation remains susceptible to exchange rate fluctuations given that foreign currency loans accounted for over a fifth of the loan portfolio as of year-end 2024.
Ratings analysts noted that the bank’s loan loss reserve coverage of stage 3 loans fell below historical levels to 51.0% in 2024 from 187.5% in 2023 and 124.2% in 2022. “We expect the GCR core capital ratio to range between 12.5% and 15.0% over the outlook period”.
However, GCR analysts hint that capital contributions from the new shareholder(s) could support the capital and leverage assessment in the next 12 to 18 months.
FBNQuest Merchant Bank’s risk profile is considered to be positive to the ratings. However, the bank’s asset quality has been pressured over the past two years by growth in the non-performing loan (NPL) ratio, which registered at 3.5% and 4.3% in 2024 and 2023 respectively.
“This is due to a stressed exposure within the steel production segment of the manufacturing sector, which made up the entirety of NPL.
“Additionally, the bank’s loan book is concentrated, with the single and twenty largest loans accounting for 11.3% and 96.9% of gross loans respectively as of 31 December 2024.
“This level of concentration poses risks to asset quality; however, the bank’s internal ratings of these obligors is strong. While we expect the risk profile to remain good over the next 12-18 months, the sustained strain in asset quality could negatively impact our assessment”, GCR said.
Rating analysts noted that FBNQuest MB is predominantly funded by rate-sensitive deposits, which accounted for 94.3% of the funding base as of year-end 2024. Thus, the bank’s cost of funds increased to 11.3% in 2024 from 8.4% in 2023 due to monetary policy rate hikes, the rating note added.
Additionally, the bank’s deposits are concentrated, with top 20 depositors accounting for 72.0% in 2024 from 44.1% in 2023.
GCR affirmed that the bank’s liquidity is strong, evidenced by the liquid asset coverage of customer deposits and wholesale funding, which registered at 89.7% and 39.0x respectively, as of 31 December 2024. These metrics are expected to remain strong over the next 12-18 months, the rating note stated.
“The Rating Watch Negative reflects our expectations that the planned change in shareholding could result in a negative ratings movement should there be limited headroom for group support uplift under the bank’s new shareholding structure”, GCR said. Pension Fund Assets Grows to N23.366 Trillion
