April 11, 2021/Proshare

by Meristem Research

The Issue

Coronation Merchant Bank Limited (Coronation MB) intends to raise up to NGN25bn via Series XV and XVI Commercial Paper issuance under its NGN100bn Commercial Paper Programme.

The firm has indicated that the issue proceeds will be used to finance short term working capital requirements.

Details on the commercial paper to be issued are:

The Issue

Coronation Merchant Bank Ltd. (CMB) was incorporated as a private limited liability bank in 1992 and obtained a discount house license from the Central Bank of Nigeria (CBN) in 1993. Following structural reforms in the Nigerian financial services sector, the company obtained CBN’s license to operate as a merchant bank in 2015. With a strategic decision to focus on core banking activities, Coronation MB divested from its two former subsidiaries (Coronation Asset management Ltd and Coronation Securities Ltd) in 2019. The primary activities of the company include trade finance, corporate and investment banking, wealth management, and treasury activities. The majority shareholder of Coronation MB is WAPIC Insurance Plc. which holds 22.80% of total shares outstanding as at 2020FY.

Coronation earns revenue from both interest and non-interest sources. In 2020FY, gross earnings fell by 12.12% YoY (to NGN27.36bn) dragged by the 20.49% dip in interest income. The sharp decline in interest income reflected the impact of the low yield environment on interest on investment securities. On the other hand, non-interest income grew by 22.72% YoY, buoyed by gains on investment securities and fee-based income. In 2021FY, we expect that the upward trend in interest rates will support interest income which will ultimately bode well for gross earnings. Also, the general improvement in business activities, relative to 2020FY, could potentially further sustain the momentum in fees income from both investment banking and trade financing activities (which jointly constitute over 65% of fees-related income in 2020FY). While foreign exchange gains may take a hit in 2021FY, its low contribution to gross earnings makes it rather negligible.

In 2020FY, operating income increased by 14.33% YoY, supported by the 26.11% YoY dip in interest expense. However, inflationary pressures in the economy contributed to the 13.56% YoY spike in the company’s operating expenses. Consequently, cost-to-income ratio declined only marginally by 34bps, staying at a low level of 51.23%. Furthermore, the high exposure of the bank to the agricultural and manufacturing sectors, which were adversely affected by the economic downturn in 2020FY, led to the 152.14% YoY spike in impairment charges. That notwithstanding, Profit from Continued Operations improved by 5.75% YoY to NGN5.04bn in 2021FY. Other than the effect of inflationary pressures, we do not envisage any deterioration in cost-to-income ratio in 2021FY. Also, we anticipate relatively modest impairment in 2021FY on the back of the improved business environment.

Given the short-term maturity of risky assets created by the bank (usually less than a year), Coronation MB has a strong liquidity position, giving us comfort over the bank’s ability to fulfil its short-term obligations. Also, the bank maintains a decent capital base with shareholder funds at NGN40.11bn as at 2021FY, well above the regulatory requirement of NGN15.00bn. Owing to the nature of its business, the bank has a high leverage (which currently stands at 10.28x). However, this does not pose any significant threat given its relatively strong brand and the quality of its capital. In addition, we note that the bank maintained zero non-performing loans in 2020FY. 

Pricing and Recommendation

In evaluating the 180-day instrument, we considered the Treasury bill instrument with Days-to-Maturity of 176 days and yield of 4.34%. The instrument therefore offers a premium of 2.91%.

For the 268-day instrument, we considered the Treasury bill instrument with Days-to-Maturity of 281 days with a yield of 5.88%. The instrument is being offered at a premium of 3.76%.

Given the company’s credit rating [A- (GCR); B- (Fitch); A+ (Augusto)], liquidity position and general performance outlook, we consider the yield of 7.25% and 9.64% on both instruments attractive. Hence, we recommend a BUY on the offer.