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

07 Oct 2019 In Rating Notifications

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

Lagos Nigeria, 7 October 2019—Global Credit Ratings has affirmed the national scale ratings assigned to FSDH Merchant Bank Limited of A-(NG) and A2(NG) in the long and short term respectively; with the outlook accorded as Stable. The ratings are valid until September 2020.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to FSDH Merchant Bank Limited (”FSDH” or “the bank”) based on the following key criteria:

The ratings accorded to FSDH take into consideration the bank’s position as the flagship member of FSDH Holdings Company Limited, its track record of over two and half decades (including operations as a discount house) in the financial services industry. Also, cognisance is taken of the bank’s sustained capitalisation and liquidity metrics over the review period.

FSDH’s capitalisation is considered strong for its current risk level, with shareholders’ fund amounting to N29.3bn at FY18. Growth in shareholders’ funds was constrained in FY18 by dividend pay-out and additional provision as a result of the implementation of IFRS 9 accounting standard. The bank’s regulatory capital adequacy ratio declined by two percentage points to 27.6% at FY18, driven by increase in risk weighted assets, but remained well above the required minimum of 10% for merchant banks.

Liquidity risk is considered minimal, with regulatory liquidity ratio maintained at strong level of 113.4% at FY18 (FY17: 120.5%). Also, cash and liquid assets to short-term funding ratio of 75.9% ranked in line with peers’ average for the period.

Gross non-performing loan (“NPL”) ratio reduced to 5.3% at FY18 (FY17: 13.4%), partly due to recoveries and write-back of some previously provisioned loans. Provision coverage of stage 3 impaired loans is considered adequate at 58.3% (FY17: 41.1%). As at 1H FY19, gross NPL ratio stood at 4.1%.

Overall profitability improved in FY18, albeit significantly supported by impairment write-back. Interest income declined year-on-year by 24.6% in FY18, while interest expenses was down by 20.3%, resulting in a 31.4% decline in net interest income. According to management, growth was constrained by high cost of funds and the tough operating environment, which is considered a sector-wide phenomenon. Furthermore, FSDH recorded a 5.9% decline in non-interest income, as fee income and securities trading activities also declined during the period. As such, total operating income closed lower by 22.6% to N8.2bn in FY18. Operating expenses was relatively stable, but cost to income ratio accelerated to 53.8% (FY17: 42.3%) due to the lower income level. However, performance at the pre-tax profit level was supported by a write-back of N1.4bn. Resultantly, pre-tax profit closed higher by 34.4% to N5.2bn, measuring above budget by 17.2%. Similarly, return on average equity and assets stood at 15.1% (FY17: 14.2%) and 3.5% (FY17: 2.8%) respectively in FY18. Performance at 1H FY19 appears to be in line with budget on annualised basis and well ahead of the corresponding period in FY18.

An upward movement in the rating may follow a significant and sustained improvement in profitability and efficiency metrics, while capitalisation and liquidity remained at strong levels. However, a downward movement in the rating may follow a further weakening in asset quality metrics and decline in profitability which impacts the bank’s capital.

           
         
NATIONAL SCALE RATINGS HISTORY
Initial rating (October 2000)*
Long term: A(NG)
Short term: A1(NG)
Outlook: Stable


Last rating (September 2018)
Long term: A- (NG)
Short term: A2(NG)
Outlook: Stable

*Refers to FSDH Discount House Limited


ANALYTICAL CONTACTS

Primary Analyst
Funmilayo Abdulrahman
.(JavaScript must be enabled to view this email address)
+234 1 904 9462-3

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


APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for rating Banks and Other Financial Institutions, updated March 2017
Glossary of Terms/Ratios, February 2016
FSDH rating reports (2000-18)


RATING LIMITATIONS AND DISCLAIMERS

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/RATINGS-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 AT www.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, FSDH Merchant Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.

FSDH 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 FSDH Merchant Bank Limited with no contestation of/changes to the ratings.

The information received from FSDH Merchant Bank Limited and other reliable third parties to accord the credit ratings included the latest audited annual financial statements as at 31 December 2018 (plus four years of comparative numbers), latest internal and/or external report to management, full year 2019 detailed budgeted financial statements, year-to-date audited accounts to 30 June 2019, 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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