Nova Merchant Bank Risks Negative Rating Action—GCR

By Dipo Olowookere

Local rating agency, Global Credit Ratings (GCR) has said Nova Merchant Bank Limited may have a negative rating action on the back of a sustained weak competitive position.

GCR, in a statement on Friday, disclosed that another reason for a possible negative action could be the inability of management to successfully execute the unveiled strategic plan, as well as material deterioration in key performance metrics (financial, capitalisation, asset quality, and liquidity metrics).

However, it said for now, it has affirmed the national scale ratings assigned to Nova of BBB-(NG) and A3(NG) in the long term and short term respectively; with the outlook accorded as stable.

GCR explained that the ratings reflect Nova’s evolving status and its limited track record of less than three years.

The agency noted that while it takes cognisance of the bank’s relatively improved financial performance and progress with the implementation of its strategic plan, the accorded ratings are, however, constrained by the current challenging macroeconomic environment and uncertainties in the Nigerian banking regulatory landscape.

According to the statement, Nova’s capitalisation is considered adequate for its current risk level and regulatory requirement.

In the 2019 financial year, its shareholders’ funds grew by 11.1 percent to N19.6 billion, buttressed by internal capital generation.

In addition, accelerated growth in risk-weighted assets saw the bank’s risk-weighted capital adequacy ratio (CAR) moderate to 54.3 percent at from 228.7 percent in FY18, albeit headroom for further expansion in risk asset base remained strong based on the regulatory minimum CAR of 10 percent. As such, GCR said it expects the bank’s CAR to moderate further as lending activities are intensified.

The statement said Nova displayed a sound liquidity profile at FY19, with key liquidity metrics comparing favourably with regulatory requirements.

Specifically, statutory liquidity ratio ranged from 55.8 percent to 200.4 percent throughout FY19, against the regulatory minimum of 20 percent.

Furthermore, the contractual matching of the bank’s assets and liabilities maturities at the balance sheet date reflects liquidity buffer across all maturity bands, with cumulative liquidity buffer amounting to N18.7 billion at FY19.

Nova’s asset quality metrics remained strong, with nil non-performing loans recorded from inception to date. Cognisance is taken of the fact that the bank recently began to build up its loan book, albeit total loan exposures remain minimal relative to peers.

The bank’s key profitability indicator improved in FY19, with pre-tax profit increasing by a sizeable 57.9 percent to N1.5 billion, buoyed by rapid growth in loan book as well as increased non-interest income.

While operating expenses rose by 32.3 percent, an outpaced growth (45.9 percent) in total operating income, saw the cost to income ratio decline to 54.1 percent in FY19 (FY18: 59.6 percent).

Overall, return on average equity strengthened to 8.9 percent (FY18: 6.7 percent), while return on average assets declined to 3.8 percent (FY18: 5.4 percent) due to a firmer growth in total assets.