Global Credit Ratings, GCR, 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.
According to GCR, the ratings of FSDH reflect its sizeable market share (in terms of total assets) and first mover positioning in the evolving merchant banking subsector in Nigeria.
At FY16, the bank had successfully completed four full years of operation as a merchant bank. The acceptability of the FSDH brand has been supported by its past track record (of over two decades) as one of the key players in the discount house subsector. Going forward, management’s effort is focused on strengthening market position.
Shareholders’ funds declined 10.5% to N22.8bn at FY16, due to impairment losses which impacted reserves. As such, the risk weighted capital adequacy ratio moderated to 24.8% (FY15: 26.1%), albeit remaining well above the 10% required minimum for merchant banks.
The gross non-performing loan ratio declined to 2.1% at FY16 (FY15: 3.3%), underpinned by recovery on some of the impaired loans. Per management, impaired loans relate largely to two obligors, one of which is now performing, with the other fully provided for. Hence, specific provision coverage of impaired loans stood at 85.7% at FY16 (FY15: 39.4%).
FSDH maintained a highly liquid balance sheet profile, with cash and tradable assets constituting 45.9% of total assets at FY16. Regulatory liquidity ratio closed the year at 93.0% at FY16, against the prudential minimum of 20%. To support the funding base in FY16, the bank issued commercial papers on the FMDQ OTC exchange, amounting to N13.1bn in FY16, with further issues planned for FY17.
On the back of a tough operating and economic environment, the bank closed the year with a profit after tax of N2.8bn, which represents a 15.9% decline from FY15.
Total operating income declined by 4.5% in FY16, due to reduced business volumes and management’s cautious approach towards risk asset creation. Also, operating expenses up 8.2% underpinned by increase in administrative and staff costs, with the cost ratio rising to 50.2% in FY16 (FY15: 44.3%). Overall, the return on average equity and assets declined to 11.8% and 2.4% respectively, from 14.6% and 3.2% in FY15.
An upward movement in the rating may follow significantly improved profitability and efficiency metrics and the maintenance of a strong capital, liquidity and competitive position. However, a downward movement in the rating may follow a significant decline in asset quality and profitability which could impact on capital, as well as, diminution in competitive strength.