By Dipo Olowookere
Indigenous rating agency, Global Credit Ratings (GCR), has announced according its national scale long term and short term ratings of A-(NG) and A2(NG) respectively to Coronation Merchant Bank Limited, with the outlook stable.
In a statement issued by the firm, it explained that the ratings reflect Coronation MB evolving competitive position in the merchant banking subsector since commencement of operation in the second half of FY15.
The bank has been able to leverage off its experience and track record of over two decades in the financial services industry. Furthermore, cognisance is taken of the fact that the bank has engaged a pool of experienced professionals to drive its new strategic intent, GCR said.
According to the statement, capitalisation is considered adequate for the current level of operation and while shareholders’ funds grew to N29.2 billion at FY17, capital adequacy ratio (CAR) equated to a lower 24.8 percent (FY16: 40.1 percent) due to increase in risk weighted assets, but remained above the required minimum of 10 percent for merchant banks.
Also, management has also commenced the process to raise debt capital in 2H FY18 to further support operations.
GCR noted that asset quality metrics remained sound as the bank is yet to record any delinquent asset since commencement of its merchant banking operation.
It said further that the loan book has been largely characterised by short-dated trade finance facilities granted to large corporates. Total loan loss provision stood at N8.2 million, following a write back of N51.6 million in FY17.
The rating company explained that the bank’s regulatory liquidity ratio stood at 53.4 percent at FY17 (FY16: 51.3 percent), against the required minimum of 20 percent for the subsector.
However, liquidity gap of N25.1 billion (FY16: N36.7 billion) was reflected in the less than one month matching of assets and liabilities.
Further supporting the bank’s liquidity profile is the cash and equivalent of N24.4 billion as at FY17 and a sizeable 66.6 percent of its investment securities in treasury bills (T-bills) and Federal Government of Nigeria bonds (FGN bonds).
Also, Coronation MB successfully raised funds through commercial paper (CP) issue in 1H FY18 which received 180 percent subscription level, equating a total of N18.2 billion. This is to further aid balance sheet management, and considered additional support to the rating.
Performance metrics moderated in FY17, underpinned by increase in cost of funding which was largely triggered by the high interest rate in operating environment during the period. As such, while the bank recorded a 66.6 percent rise in interest income, interest expenses rose by a higher 166.8 percent and resulted in 3.5 percent decline in net interest income. Furthermore, profitability was constrained by 29.6 percent increase in operating expenses, given the increase in staff and IT upgrade cost. As such, pre-tax profit equated to N4.9 billion in FY17, representing 5.1 percent decline from FY16 level.
Consequently, return on average equity and assets (ROaE and ROaA) closed the year at 16.8 percent and 3.9 percent respectively from 21.6 percent and 5.6 percent respectively in FY16. Also, performance as at 1H FY18 appears somewhat in line with FY17 actual, albeit below budgeted figures on annualised basis.
An upward movement in the ratings may follow a sustained improvement in profitability and earnings, while maintaining sound asset quality metrics. Furthermore, a downward review of the ratings may result from a significant decline in the asset quality, capitalisation or liquidity profile of the bank. Furthermore, a significant decline in earnings or profitability, such that the bank is unable to compete with peers, may lead to a negative rating action.
Modupe Gbadeyanka 
Aduragbemi Omiyale