Nova Merchant Bank Sees Significant Growth with N2bn Pre-Tax Profit in 5 Months

…receives approval-in-principle from CBN for commercial banking license

… plans to raise additional equity capital of N160 billion

Nova Merchant Bank Limited (Nova MB) has recorded a pre-tax profit of over N 2 billion in the five-month period ended 31 May 2024.

It however reported an overall net interest expense of NGN674.7 million compared to net interest income of NGN1.9 million in 2023 (2022: NGN659.8 million).

As a result, market-sensitive income accounted for a significant 82.4% (2023: 53.8%, 2022: 64.8%) of total operating income.

GCR a ratings agency, notes that Nova MB reflects adequate capitalisation metrics, a risk position that is broadly within the average range of the industry as well as a stable funding and liquidity position.

These strengths are however offset by the weaker earnings quality, limited geographical diversification, and concentrated customer base.

Nova MB has grown steadily over the years, registering a five-year CAGR of 67.3% in total assets to NGN327.4 billion ($364.1 million) in the financial year ended 31 December 2023.

The bank controlled an estimated 18%, 21%, and 25% of the merchant banking subsector’s total assets, gross loans, and customer deposits respectively in 2023.

However, its contribution to the broader banking industry remained less than 1%.

During the first quarter of 2024, Nova MB received an approval-in-principle from the Central Bank of Nigeria for a commercial banking licence.

Therefore, the bank’s anticipated transition to a full-fledged commercial bank could enhance its competitive position, over the longer term, through an improved market share diversified operations, and lower funding costs.

Nova MB plans to raise additional equity capital of N160 billion

Following a sustained moderation in Nova Merchant Bank’s GCR core capital ratio from 30.9% in 2020 to 19% in 2022, the metric increased to 23.8% as of 31 December 2023 and further to 28.5% as of Q1, 2024 on account of a decline in risk-weighted assets (RWA), following the settlement of outstanding matured letters of credit obligations, and continuous growth in qualifying capital.

Nova MB’s shareholders’ equity strengthened to N32.3 billion in the first quarter of 2024 (2023: N29.8 billion), following the capital injection of N1.4 billion through a rights issue as well as the impact of earnings accretion.

With the regulatory-induced recapitalisation of the Nigerian banking sector, Nova MB plans to raise additional equity capital of over NGN160 billion through a combination of rights issue, private placement, and an initial public offer (IPO) within the two-year timeframe (2024-2026) to meet the new capital requirements for the commercial banking license.

“We consider Nova MB’s transition to a commercial bank vital for the quality of earnings and capital over the next 12-18 months given that income from the core lending business was pressured in the first five months of 2024 by a faster repricing of liabilities (largely wholesale customer deposits) compared to assets following the successive hikes in the Monetary Policy Rate (MPR) in 2024,” GCR said.

Nova MB’s risk position is a positive rating factor underpinned by sound asset quality metrics and a cautious lending approach.

Gross loans increased by a moderate 7.4% to NGN 103.9 billion ($115.5 million) as of 31 December 2023 (2022: NGN 96.7 billion) but declined by 31.1% to NGN71.6 billion ($48.2 million) as of 31 May 2024.

The decline in gross loans is underpinned by paydowns due to the high interest rate environment.

Non-performing loans (NPL) and credit loss ratios remained below 0.5%, consistent with the 2022 levels, despite the challenging macroeconomic environment.

Concentration risk remained high as the top twenty obligors accounted for 88.7% (2022: 87.0%) of the loan book as of 31 December 2023, a common trend in the merchant banking subsector.

Foreign currency exposures were moderate, relative to the industry average, at 34.2% (2022: 24.2%) of gross loans as of 31 December 2023 and are largely naturally hedged and the outstanding matured letters of credit obligations have been paid by CBN.

Nova MB is predominately funded by customers’ deposits which are largely interest rate sensitive and wholesale deposits (a minimum of NGN50 million). In 2023, the proportion of price-sensitive term deposits to total deposits registered at a high 91.3%, resulting in a high cost of funds at 10.0%, like other merchant banks.

Depositor concentration risk persists as the twenty largest depositors accounted for a higher 85.0% (2022: 63.4% of total customer deposits as of 31 December 2023. Over the next 12-18 months, GCR expects a more diversified depositor base anchored on the mobilisation of more stable low-cost deposits in the event of a successful transition, thus moderating the cost of funds.

Nova Merchant Bank’s balance sheet is liquid as liquid assets coverage of customer deposits and liquid assets coverage of wholesale funding registered at 52.3% (2022: 28.8%) and 8.9x (2022: 5.0x) respectively in 2023.