GCR Affirms FBN Merchant Bank Limited’s Rating of A-(NG); Stable Outlook

31 Oct 2016 In Rating Notifications

GCR Affirms FBN Merchant Bank Limited’s Rating of A-(NG); Stable Outlook

Lagos Nigeria, 31 October 2016 - Global Credit Ratings has affirmed the national scale credit ratings assigned to FBN Merchant Bank Limited of A-(NG) and A2(NG) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until September 2017.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings based on the following key criteria:

The ratings of FBN Merchant Bank Limited (“FBN MB” or “the bank”) reflect its strong competitive position, underpinned by the solid operational track record of the individual entities that made up the bank – principally Kakawa Discount House Limited– in addition to its new status as a subsidiary of FBN Holdings Plc (one of the largest financial services groups in Africa).

FBN MB’s capitalisation level is considered strong, with total shareholders’ funds standing at N27.8bn at 31 December 2015 (“FYE15”), resulting in a satisfactory risk weighted capital adequacy ratio (“CAR”) of 23.0%, exceeding the 10% minimum statutory requirement by comfortable margin. The capital level rose slightly (by 1.4%) to N28.2bn at 30 June 2016 on account of internal capital generation in 1H F16, lifting the CAR to 27.4% at that date.

FBN MB’s liquidity risk is considered minimal, based on the bank’s highly liquid balance sheet. Cash, interbank balances, and highly liquid investment securities jointly comprised 56.3% of assets at FYE15. The bank’s statutory liquidity ratio stood at 63.1% at FYE15 and further improved to 84.6% at 30 June 2016 (well above the 20% statutory requirement).

Impaired loans and advances rose by 9.2% to N4.6bn at FYE15. Rapid growth in advances, however, saw the gross non-performing loan (“NPL”) ratio decline to 12.2% (FYE14: 15.0%). According to management, the major impaired credit (amounting to N3.5bn) is backed by a guarantee from the Federal Government of Nigeria (“FGN”), which has been called (with the payment process now at an advanced stage). Thus, a low arrears coverage (specific and collective) of 17.0% has been maintained by the bank. It is furthermore noted, that the gross NPL ratio has declined to below 3.5% at 30 October 2016 following the sale of a significant portion of the major NPL to a third party in 3Q F16.

An after tax profit of N6.6bn was recorded for F15 (supported by a tax credit totalling N2.7bn), while unrealised gains on available for sale securities (totalling N4.2bn) brought total comprehensive income for the year to N10.8bn, over five times the level recorded in F14. Profitability was more modest in 1H F16. With no allowance for impairment charge made in 1H F16 actual figures, a pre-tax profit of N1.9bn was reported for 1H F16, translating to an annualised 80.9% of the full year F16 budget.

Improvement in asset quality, profitability and efficiency metrics, and a strong competitive position could trigger positive rating action. Rating downgrade could follow a deterioration in asset quality, pressure on efficiency and profitability.

 
NATIONAL SCALE RATINGS HISTORY                                                                

Initial rating (June 2006)*                                             
Long term: A(NG)
Short term: A1(NG)                                                                                 
Outlook: Stable                                                        

Last rating (July 2015)                                             
Long term: A-(NG)                                                                                   
Short term: A2(NG)
Outlook: Stable                                                        

*Refers to Kakawa Discount House Limited.

ANALYTICAL CONTACTS

Primary Analyst
Julius Adekeye
+23 41 462 2545
.(JavaScript must be enabled to view this email address)                       

Committee Chairperson
Dave King
.(JavaScript must be enabled to view this email address)


APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Nigerian Banking Sector Bulletin, 2015
FBN MB rating reports (2006-15)
Glossary of Terms/Ratios (February 2016)

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:  HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The ratings were solicited by, or on behalf of, FBN Merchant Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.

FBN Merchant Bank Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings above were disclosed to FBN Merchant Bank Limited with no contestation of the ratings.

The information received from FBN Merchant Bank Limited and other reliable third parties to accord the credit ratings included the latest audited annual financial statements as at 31 December 2015 (plus one year of comparative numbers), latest internal and/or external report to management, full year 2016 detailed budgeted financial statements, most recent year-to-date unaudited accounts to 30 June 2016, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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