Strong Capital Base: GCR Upgrades TrustBanc Holdings Rating

GCR Ratings (GCR) has upgraded TrustBanc Holdings Limited’s national scale long-term Issuer rating to BBB(NG) from BBB-(NG) and affirmed the short-term issuer rating at A3(NG). The outlook on the ratings is stable.

In its rating note, GCR said the upgrade of TrustBanc Holdings Limited’s rating reflects an enhanced capital base and a sustained strong financial leverage ratio.

The ratings also balance a relatively stable funding structure, adequate liquidity and good risk position against a modest competitive position and a weak earnings profile, the rating note added.

The rating agency noted that TrustBanc is an emerging player within the Nigerian non-bank financial sector with operations in asset management, microfinance banking, capital management and structured financing.

It said in 2022, the group established a new finance company to provide structured loans to medium and large companies that require extensive financing.

In addition, TrustBanc is in the process of increasing its unit microfinance bank (MFB) Tier 1 capital to N2.5 billion or $3 million as of October 2023 from N1 billion or $2 million in December 2022, currently awaiting approval by the Central Bank of Nigeria to enhance market penetration and grow its customer base, the rating note revealed.

GCR said these developments are intended to boost the group’s operational capacity and foster development across its business segments. However, the group’s competitive position is constrained by its relatively small size and lower operating revenues relative to peers.

The ratings indicate that TrustBanc’s capital and leverage assessment is a key rating strength underpinned by a sustained strong financial leverage ratio and modest loss reserves.

According to GCR, the total capital base, which is currently higher than rated peers, increased to N13 billion in October 2023 from N3 billion in December 2021 following the two tranches of capital injection.

GCR said this was targeted at maintaining a strong capital base, supporting business development and adequately covering capital depletion threats posed by the challenging operating economic environment.

According to the rating note, the group’s financial leverage ratio improved to 24.2% in October 2023 from 21.6% in December 2022.

Looking ahead, analysts expect the financial leverage ratio to be sustained above 20% on the back of a conservative growth and allocation of assets as well as a stronger capital base.

Also, GCR said the Group’s risk position is slightly positive to the ratings. Although gross loans rose by 30% to NGN22.5 billion in October 2023 from NGN17 billion in 2021, non-performing loans (NPL) reduced by 60% due to recoveries, resulting in a lower NPL ratio of 1.3% as of 31 October.

In addition, Trustbanc increased loan loss provisions on impaired loans to 99% as of 31 October 2023. Conversely, the credit loss ratio inched up to 1.7% in October 2023 from 1.3% in December 2022 reflecting the pressures emanating from the weaker operating environment.

“Nonetheless, we expect TrustBanc’s asset quality metrics to be maintained within the industry’s average underpinned by a conservative risk management framework”.

GCR said the group’s funding and liquidity assessment balances a somewhat diversified funding base with moderate liquidity. The group’s funding base as of 31 October 2023 comprised managed funds (81%), customer deposits (8%) and other borrowings (7%).

Though there is an increasing concentration in managed funds, the funding base has been relatively stable comprising termed funds from diverse sectors of the economy that are typically rolled over at maturity, the rating firm said.

Analysts noted that there is a strategic shift in borrowings from more costly commercial papers to cheaper and longer-tenured funding from DFIs, which should moderate the cost of funding going forward.

Liquidity is adequate as liquid assets covered short-term wholesale funding 7.3x in October 2023 and customer deposits 0.7x in October 2023 versus 1.86x in 2021.

“We anticipate the funding base and liquidity profile to remain stable and robust over the outlook period. However, any material reduction in liquid assets against high short-term funding will weaken the liquidity”.

Outlook statement

GCR said in the note that the stable outlook is anchored on the expectation that TrustBanc’s growth strategies and good risk management across its business segments will continue to support earnings and the financial leverage ratio above 20% over the next 12-18 months.

In addition, GCR expects TrustBanc will maintain a robust internal capital base and conservative asset holding supporting stable funding and a good liquidity profile. Naira Devaluation Deepens Economic Crisis in Nigeria