Coronation Merchant Bank’s Outlook Remains Negative Amid Ongoing Capitalization Challenges

GCR has affirmed the ratings of Coronation Merchant Bank Limited however it maintained a negative outlook reflecting expectations of sustained pressure on capitalisation.

Although Coronation MB’s Tier 1 capital improved in 2023 on account of equity injection and stronger earnings, GCRs assessment of capitalisation remains a limitation to the ratings.

The bank carried out a rights issue in 2023, from which it raised N9.3 billion (USD5.9 million) to increase shareholders’ funds to N37.3 billion (USD23.5 million) as of 31 December 2023.

Consequently, the bank’s GCR Core Capital Ratio improved to 12.3% as of 31 December 2023 (2022: 9.5%) and 13.3% as at 30 June 2024.

Operating revenues strengthened to N14.3 billion in 2023 from a loss position in 2022; however, the bank’s net interest margin remained in the negative territory largely due to the impact of the aggressive cash reserve requirement (CRR) debits.

About Coronation MB

Coronation Merchant Bank is one of the market leaders within the merchant banking subsector (the subsector) in Nigeria. The bank’s product offerings include investment, corporate & private banking, wealth management, trade finance and treasury services.

Despite the weak operating revenues over the last two years, the bank accounted for a significant 26.9% of the subsector’s assets, making it the second largest merchant bank with its total assets of N524 billion (USD331 million) as of 31 December 2023. However, Coronation MB’s share of the wider banking sector, accounts for less than 1% of total assets.

Coronation MB’s risk position is sound, evidenced by nil non-performing loans since inception and historically low credit loss ratio of less than 1%.

The bank’s risk profile is supported by stringent underwriting criteria, rigorous selection and monitoring process, and adequate collateralisation using cash, all asset debentures and negative pledges.

However, the loan book remains highly concentrated by obligor, similar to other merchant banks. The twenty largest obligors constituted a higher 86% of gross loans as of 31 March 2024 (2023: 71.2%), largely driven by the bloating impact of naira devaluation in 2023 and in the first half of 2024.

Foreign Currency (FCY) loans contributed a high 70.9% to the loan book as of 31 December 2023 (2022: 64%), however, this reduced significantly to 24.5% as of 31 March 2024, due to the clearance of FX backlogs by the CBN.

Coronation MB’s activities are largely funded by customer deposits (or core deposits), which accounted for an average of 61.7% of the funding base between 2020 and 2022. However, core deposits made up just 46.8% of the bank’s funding base as of 31 December 2023, due to increased reliance on more expensive institutional funding for liquidity.

As such, non-core deposits made up 46.8% of the bank’s funding base as at 31 December 2023 (2022: 29.4%, 2021: 14.1%) and cost of funds inched up to 12.6% in the same period (2022: 11.3%).

Following the decline in CRR for merchant banks, Coronation MB significantly reduced its dependence on institutional funding, leading to a decline in non-core deposits, which made up 27.4% of the funding base as of 30 June 2024.

The positive revision of cash reserve requirements also improved liquidity, as GCR liquid assets coverage of customer deposits grew to 89.5% as of 30 June 2024 relative to 68.9% in 2023.

“A negative rating action could result from Coronation MB’s GCR core capital ratio remaining at 13.3% or weakening further over the next 12 months. Weaker asset quality and liquidity metrics as well as a higher attrition rate of senior management staff could also be viewed negatively,” GCR said.