Global Credit Rating (GCR) has downgraded FBNQuest Merchant Bank Limited’s national long and short-term issuer ratings to BBB (NG) and A3 (NG) respectively, revising the bank’s outlook to Rating Watch Negative.
This move follows sustained pressure on the bank’s capital metrics, with a notable decline over the last three years due to accelerated growth in risk-weighted assets (RWA) outpacing internal capital generation.
In its rating note, GCR highlighted that while FBNQuest’s stable funding and strong liquidity profile offer positives, the bank faces challenges, including a weakening asset quality and a competitive market position.
The ratings watch indicates potential risks due to FBN Holdings Plc’s impending divestment from FBNQuest Merchant Bank, which could affect the bank’s support structure within the FBN group, a group anchored by one of Nigeria’s largest commercial banks.
As a subsidiary of FBN Holdings, FBNQuest Merchant Bank has historically benefited from brand alignment and operational integration with its parent company. However, with the anticipated change in ownership, analysts indicated that a further downgrade may occur if the bank fails to meet group support criteria under its new ownership structure.
GCR also pointed to the decline in FBNQuest’s core capital ratio, which dropped to 9.3% by August 2024 from 12.8% in December 2023, falling within the lower assessment band.
This trend reflects the impacts of naira devaluation, shrinking loan loss reserves, and a concentration of exposures within sectors like oil, gas, agriculture, and manufacturing, which comprised 76.1% of its loan portfolio as of year-end 2023.
The bank’s non-performing loan (NPL) ratio increased from 1.4% in 2022 to 4.3% in December 2023, driven largely by credit stress within Nigeria’s steel sector, which accounted for 96% of the NPLs. This increase in credit risk highlights the bank’s vulnerability to sector-specific shocks, with single and top 20 loan exposures constituting 13.3% and 92.3% of total gross loans, respectively, as of August 2024.
Despite these challenges, FBNQuest’s recent operational improvements have yielded profit before tax of NGN8.2 billion as of August 2024, up from NGN4 billion in December 2023. The bank’s funding base remains predominantly sourced from customer deposits, which made up 74.5% of the base as of December 2023, albeit with a sensitivity to interest rate changes due to its wholesale banking nature. In addition, the bank’s cost of funds increased to 11.3% in August 2024 from 8.4% in 2023, driven by the Central Bank of Nigeria’s upward adjustments in the Monetary Policy Rate (MPR).
In light of the sector’s evolving dynamics, GCR noted that FBNQuest’s liquidity metrics showed improvement, with a liquid assets coverage of customer deposits and wholesale funding reaching 73.3% and 16.2x, respectively, following the reduction of the Cash Reserve Ratio (CRR) for merchant banks to 10% from 32.5% in August 2023. These metrics are anticipated to remain stable in the coming 12 to 18 months.
GCR’s Rating Watch Negative outlook on FBNQuest Merchant Bank underscores the possibility of further rating action should the bank’s new ownership structure limit the potential for group support.
