GCR Affirms Coronation Strong Credit Rating Plus Stable Outlook
GCR Ratings has affirmed Coronation Merchant Bank Limited’s national scale long-term and short-term ratings of A-(NG) and A2 (NG) respectively, with a stable outlook.
The emerging market focused ratings agency announced the result of its most recent credit assessment on the issuer in a new report posted on its website.
The issuer ratings affirmed mean the Coronation Merchant Bank has high credit quality relative to other issuers with high certainty of timely payment of short term obligations relative to other issuers were anchored on the lender’s adequate funding and liquidity position as of the financial year 2020.
“The ratings of Coronation Merchant Bank Limited reflect its adequate funding and liquidity position, and sound asset quality metrics, as evidenced by the nil non-performing loans since inception to date”, GCR said in the credit report posted on its website.
However, it spotted that these strengths are partly offset by the bank’s modest competitive position, significant loan book concentration and heavy reliance on wholesale funding from financial institutions.
“Coronation MB is a strong player within the Nigerian merchant banking subsector based on its product/service delivery, loan portfolio and deposit mobilisation capacity relative to peers.
“Leveraging its long track record (having previously operated as a discount house for over two decades) and partnerships, the bank ensures consistent enhancement of its operational scale, particularly within the trade finance space”, GCR highlighted in the report.
Meanwhile, the ratings indicated there is a perceived concentration risk in the merchant bank operation as the 20 largest obligors and depositors account for 85% and 75.4% of gross loans and total deposits as of the financial year 2020.
GCR called this pattern reflective of the merchant lender’s relatively small customer base and the trends across the merchant banking subsector.
Also, the rating said in the report that the bank evidenced moderate market share within the Nigerian banking industry in terms of total assets, customer deposits, and loan portfolio, which is estimated at 0.8%, 0.7% and 0.7% respectively in 2020.
Meanwhile, GCR said in the report that it computed capital ratio registered at 17.6% as of the financial year 2020 compared with 19.8% in 2019 and expected this to moderate to 16%-17% range over the next 12-18 months in view of the outpacing growth in risk-weighted assets vis-Ã -vis internal capital generation.
However, it said Coronation’s earnings quality is considered ratings negative, reflected by revenue stability risk characterised by high source concentration and material exposure to market sensitive income, which constituted a sizeable 42.5% of total operating revenue in 2020 as against 41.3% recorded in 2019.
“Risk position is sound and a key rating strength, underpinned by the bank’s nil NPL since inception to date and moderate credit losses of 0.2% at FY20, which broadly compared favourably with the industry average of about 3%.
“Initial assessments of the potential impact of the COVID-19 pandemic indicated that the bank will not be immune to the sector-wide challenges, which include asset quality concerns and slower loan repayments”, the ratings agency added.
However, GCR believes that this impact has thus far remained minimal, with the bank making no recourse to regulatory forbearance during the period.
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“That said, we expect NPL and credit losses to remain at similar strong range over the rating horizon on the back of sustenance of stringent underwriting criteria and the macroeconomic environment recoveries”.
Conversely, the loan book is considered highly concentrated, with the top twenty obligors accounting for 85% of the loan book at FY20.
“While this is a rating constraining factor and typical of merchant banks in Nigeria, management expects this concentration to moderate somewhat over the short to medium term on account of the recent sectoral coverage expansion”, GCR stated.
The ratings firm said it is also cognisant of the bank’s significant exposures to market risk considering the substantial market sensitive income realised in 2020.
It considered Coronation MB’s funding base as adequate, predominantly bolstered by the debut N25 billion subordinated unsecured bonds issued during 2020, as well as its improved deposit mobilisation capacity.
“As a result, the GCR long term funding ratio and stable funding ratio was robust at 80.8% and 73.1% respectively at the financial year 2020”.
While cognisance is taken of the sizeable (41.3%) growth in customer deposits in 2020, the ratings agency insisted that concentration risk is evident, with the top twenty depositors accounting for 75.4% of the deposit book, the bulk of which were from financial institutions.
Positively, it added that the bank liquidity position is solid, with the GCR liquid asset covering wholesale funding and customer deposits by 3.9x and 53.1% respectively at FY20.
Outlook statement
The report said the bank’s stable outlook reflects GCR’s expectation that Coronation MB’s asset quality metrics would remain sound despite the strains in the operating environment, albeit with the loan portfolio concentration by obligor remaining high.
It also added that GCR calculated capital ratio is anticipated to moderate to 16-17% range over the next 12-18 months given our expectation that the outpacing growth in risk-weighted assets vis-Ã -vis internal capital generation will continue to weigh down capitalisation metrics.
However, GCR said it will positively consider a material improvement in core earnings over the rating horizon.
“While we anticipate liquidity to remain sound, diversification of the deposit book with a better mix of non-financial institution clients would be positively considered”, the Ratings said.
GCR Affirms Coronation Strong Credit Rating Plus Stable Outlook
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