Fitch Revises Coronation Merchant Bank's Outlook to Stable; Affirms IDR at 'B-'

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Wednesday, December 16, 2020 / 10:30 AM / by Fitch Ratings / Header Image Credit: Coronation Merchant Bank


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Fitch Ratings has revised the Outlook on Nigeria-based Coronation Merchant Bank Limited's (CMB) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'B-'. Fitch has also affirmed CMB's Viability Rating (VR) at 'b-' and National Long-Term Rating at 'BBB (nga)'. A full list of ratings is below.

 

The revision of the Outlook to Stable reflects Fitch's view of receding near-term risks to the bank's intrinsic creditworthiness from the economic downturn. In our view, the bank's Long-Term IDR has sufficient headroom at the 'B-' level to absorb moderate shocks from the difficult operating environment, including heightened intervention and regulatory risks, and resulting risks to its financial profile in 2021.

 

Key Rating Drivers

IDRs and VR

CMB's Long- and Short-Term IDRs are driven by its standalone credit profile as determined by its VR. The bank's VR reflects Nigeria's (B/Stable) challenging and volatile operating environment, which influences CMB's financial and non-financial rating factors.

 

The bank's business model and risk management has held firm during the past few difficult quarters and has prevented asset-quality deterioration or pressure on its funding and liquidity. CMB's lending has continued to grow rapidly (up 45% yoy in 9M20), in line with high demand for imports and the diversification of the bank's funding profile. The bank has not afforded any debt relief to its clients and has not applied regulatory forbearance on its loan classifications. However, given the likely impact of the economic shock on businesses and the bank's high credit concentrations, there is a real risk to its asset quality, unless economic recovery gathers pace.

 

CMB is a leading independent merchant bank in Nigeria and its company profile has a high influence on its ratings, reflecting its niche and developing franchise, potential for earnings volatility and structural funding and liquidity weaknesses, given its reliance on short-term wholesale deposits and market funding.

 

CMB's primary risk exposure is to short-term (up to one year) self-liquidating corporate loans and traditional trade finance, and Nigerian treasury bills. This is balanced by CMB's good management of credit and market risks. Operational risk is inherent in the business but losses are low.

 

CMB has good asset quality, reporting zero impaired loans (IFRS 9 Stage 3) at end-9M20, which has also been the case for the last four financial years. This reflects the bank's lower risk business model and risk management capability. The bank also has zero Stage 2 loans. However, asset quality is the main risk to the bank because of very high borrower concentrations (top 20 loans represented 97% of gross loans and 2x its equity at end-1H20) and significant foreign-currency-denominated trade loans (forming 55% of total loans at end-9M20).

 

CMB remained profitable in 9M20 with operating income being stable yoy, at around 3% of risk-weighted assets, because of improving net interest income (NII) and despite lower trading income. Interest income was affected by lower yields on government securities, but NII held up thanks to the lower cost of funding, a combination of lower rates and funding diversification. Fitch expects earnings pressures to persist into 2021 because of weak macroeconomic conditions. Profitability will be further pressured by moderately higher loan impairment charges, reflecting some credit quality deterioration, in Fitch's opinion.

 

CMB is adequately capitalised, reporting Tier 1 and total capital adequacy ratios (CAR) of 14.9% and 15.4%, respectively, at end-9M20 (end-2019: 18.6% and 19.2%, respectively). The pressure on capitalisation came from mainly rapid risk- asset growth, and to a lesser extent, currency devaluation. CMB recently concluded a Tier 2 debt issue which will strengthen its total CAR but given the bank's aggressive growth strategy, its capital ratios are likely to remain at current levels over the medium term.

 

Our assessment of capital also considers CMB's small absolute capital base, which exposes the bank to even moderate capital eroding losses. Given its business model, in the event of capital pressure we believe that CMB could de-leverage its balance sheet, if needed.

 

CMB's funding structure is a relative rating weakness as the bank is funded entirely by price- and confidence-sensitive wholesale funding, including corporate deposits, short-term bank borrowings and commercial paper. Around 32% of CMB's non-equity funding was in foreign currency at end-9M20.

 

Corporate deposits are highly concentrated by name, with the top 20 deposits forming over half of total deposits. Given the nature of its trade finance business, the bank has a reliance on short-term foreign currency funding, which could decline if sovereign risks rise, leading to pressure on foreign currency liquidity. Balance sheet liquidity is underpinned by the short-term nature of the bank's trade finance assets and large holdings of liquid assets.

 

The bank is highly liquid in local currency but conversion to foreign currency is challenging under current market conditions. At end-9M20, highly liquid assets in foreign currency (cash and interbank) covered short-term (less than one month) foreign currency-liabilities (excluding contingent liabilities) by about 40%.

 

Support Ratings and Support Rating Floor

Fitch believes that sovereign support to CMB cannot be relied on given Nigeria's weak ability to provide support, particularly in foreign currency. Therefore, the Support Rating Floor (SRF) of all Nigerian banks is 'No Floor' and their Support Ratings (SRs) are '5'. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.


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National Ratings

CMB's National Long- and Short-Term Ratings reflect its creditworthiness relative to other issuers in Nigeria. The ratings reflect the bank's niche company profile and vulnerability of the business to exogenous shocks.

 

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

 

Upside for ratings is currently limited given difficult operating conditions and risks to funding and liquidity due to market volatility.

 

Factors that could, individually or collectively, lead to negative rating action/downgrade:

 

The most immediate downside risk to CMB's ratings is any material deterioration in asset quality given its high borrower concentrations, that significantly erodes capital buffers. Tightening foreign currency liquidity mainly due to adverse market conditions and reduced access to foreign currency funding could be negative for the bank's ratings.

 

A strategic shift towards higher-risk exposures or increased concentrations could also result in a downgrade, although this is not our base case given the bank's consistent strategy to date and growing customer base.

 

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.

 

References For Substantially Material Source Cited As Key Driver Of Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.


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ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.

 

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