November 30, 2023/Fitch Ratings

Fitch Ratings has downgraded Nigeria-based Coronation Merchant Bank Limited’s (CMB) Long-Term Issuer Default Rating (IDR) to ‘CC’ from ‘B-‘ and its Viability Rating (VR) to ‘cc’ from ‘b-‘. Fitch has also downgraded CMB’s National Long-Term Rating to ‘B+(nga)’ from ‘BBB-(nga)’. The ratings have been removed from Rating Watch Negative (RWN). A full list of rating actions is provided below.

The downgrade of the VR reflects Fitch’s estimate of a significantly weakened capital position at the bank that, if not replenished by its planned rights issue or other measures, could lead to a material capital shortfall. It also reflects a weakening in the bank’s foreign-currency (FC) liquidity considering a diminished ability to refinance upcoming FC debt maturities in view of the estimated significant weakening in capitalisation.

The downgrade of the Long-Term IDR reflects Fitch’s view that a default on the bank’s senior obligations is probable in view of heightened FC liquidity risk. Fitch does not typically assign Outlooks to Long-Term IDRs in the ‘CCC’ category or below since the volatility of these ratings is very high.

The downgrade of the National Long-Term Rating reflects Fitch’s view that CMB’s creditworthiness has weakened relative to that of Nigerian peers. Fitch has assigned a Negative Outlook to the National Long-Term Rating, reflecting our expectation that its creditworthiness might weaken further relative to that of Nigerian peers.

Key Rating Drivers

CMB’s Long-Term IDR is driven by its standalone creditworthiness, as expressed by its VR. The VR reflects the bank’s heightened FC liquidity risks and Fitch’s estimate of a large breach of CMB’s regulatory capital requirement due to the sharp devaluation of the Nigerian naira and weak profitability. The VR is two notches below the implied VR of ‘ccc’ due to the following adjustments: capitalisation and leverage; funding and liquidity. CMB’s National Ratings are the lowest among that of Fitch-rated banks in Nigeria, reflecting the bank’s weak capital position and heightened liquidity risks.

Weak Capitalisation: Fitch estimates that CMB’s capitalisation has materially weakened as a result of the sharp depreciation of the naira since June 2023 and weak profitability resulting from the Central Bank of Nigeria’s (CBN) highly punitive cash reserve ratio (CRR) requirement. CMB plans to strengthen capitalisation through a material rights issue.

Renewed divergence between the official exchange rate and parallel market rate creates the possibility of further naira depreciation, which would exert further negative pressure on the bank’s capitalisation.

Weak FC Liquidity: CMB’s merchant banking license results in a reliance on price- and confidence-sensitive funding, including corporate deposits (end-2022: 42% of liabilities), bank borrowings (21%) and commercial paper (another 2%). Fitch believes CMB’s ability to refinance large upcoming FC debt maturities has diminished in view of its weakened capitalisation.

Loss-Making Entity: CMB reported a large net loss in 2022 (in the form of a negative return on average equity (ROAE) of 25%) due to negative net interest margins. The latter resulted from a high cost of funding combined with high exposure to low-yielding government securities (including CBN-issued special bills) and unremunerated cash reserves at the CBN (end-2022: a combined 43% of total assets).

We believe that the CBN’s delay in releasing unremunerated cash reserves following the reduction of the CRR applicable to merchant banks to 10% from 32.5% in July 2023 has continued to affect CMB’s earnings.

Weak Business Profile: CMB is a small merchant bank (end-2022: under 1% of Nigeria banking sector assets) with a limited franchise. Its merchant banking model is more affected by the CBN’s high CRR requirement than commercial banks.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The Long-Term IDR will be downgraded if a default-like process begins on senior FC obligations.

The VR will be downgraded if the likelihood of the bank experiencing a material capital shortfall or defaulting on its senior obligations increases.

The National Ratings will be downgraded if CMB’s local-currency creditworthiness weakens further relative to that of other issuers in Nigeria.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade of the VR would require a material strengthening of the bank’s capital position and a reduction in FC liquidity risks. An upgrade of the Long-Term IDR would result from an improved capacity of the bank to honour its FC senior obligations.

The National Ratings will be upgraded if CMB’s local-currency creditworthiness strengthens relative to that of other issuers in Nigeria.

VR Adjustments

The business profile score of ‘ccc’ is below the ‘b’ category implied score due to the following adjustment reason: business model (negative).

The asset quality score of ‘b-‘ is below the ‘bb’ category implied score due to the following adjustment reasons: concentrations (negative), non-loan exposures (negative).

External Appeal Committee Outcomes

In accordance with Fitch’s policies the Issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.

References for Substantially Material Source Cited as Key Driver of Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The ESG Relevance Score for Management Strategy is ‘4’ as the CBN’s intervention in Nigerian banking system by introducing a high CRR affects CMB’s ability to generate profitable business. This has a negative impact on CMB’s credit profile and is relevant to the ratings in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision.