In reflection of its very good financial condition and strong capacity to meet obligations, Agusto & Co. limited has assigned an “Aa-” rating to Rand Merchant Bank Limited.
A statement from the rating agency said it upgraded the merchant bank’s rating as a result of its improved earnings and strengthened profitability profile, as well as its good liquidity track record.
Agusto said the bank’s profile is buoyed by demonstrated support from its parent company, FirstRand Limited in various capacities, spanning risk management, customer referrals and liability generation.
However, it stressed that the rating was constrained by lingering concentration risks in its loan portfolio and its funding profile, as well as the lull in the macroeconomic environment in which it operates.
Following a return to profitability in 2017, the bank’s profits further strengthened in 2018 with a pre-tax profit of approximately N10 billion, 37.2 percent higher than the prior year and translating to returns on average assets and average equity of 5.3 percent and 29.7 percent respectively.
Profit was upheld by expanding earning streams. These include its core lending business, investments in government securities, transaction-tied advisory, as well as foreign exchange trading which buoyed contributions of the bank’s global markets business division.
Overall, profitability stood good despite interest expense on deposits and borrowings accounting for 67.8 percent of interest income, given the funding restrictions of the merchant banking space and concurrent high cost of funds from rate-sensitive corporates.
Merchant banks re-emerged with a review of regulatory guidelines governing the Nigerian banking industry in 2010. Subsequently, the merchant banking space has witnessed significant growth and emergence of new players, bringing the total number of such licensed banks currently operating in Nigeria to five.
Restrained from retail deposits by the regulation requiring minimum deposits of N50 million per tranche, their customer base has implicitly been restricted to rate-sensitive corporates, high net worth individuals and other financial institutions, for liability generation.
Thus, funding costs are behaviourally higher than that of commercial banks, while deposits are comparatively more volatile.
Merchant banks nonetheless continue to leverage the malleability of their operating license to optimise income – spanning investment banking activities which include asset management, advisory structuring, corporate finance, to mention a few.
This in addition to traditional commercial banking activities. Whilst return on equity for most merchant banking operators currently stands below than of commercial banks at sub-20 percent, capitalisation and asset quality remain comparatively better.
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