30 June 2021 – GCR Ratings (GCR) has upgraded the national scale long and short-term ratings assigned to Rand Merchant Bank Nigeria Limited to AA-(NG) and A1+(NG) respectively, with a Stable Outlook.
| Rated Entity | Rating class | Rating scale | Rating | Outlook |
| Rand Merchant Bank Nigeria Limited | Long Term issuer | National | AA-(NG) | Stable |
| Short Term issuer | National | A1+(NG) |
Rating rationale
The rating upgrade is underpinned by Rand Merchant Bank Nigeria Limited’s (RMBN) strong capitalisation, adequate funding and liquidity, and sound risk position characterised by nil non-performing loans (NPL) since inception to date. Further supporting the rating is the robust financial and technical support from its parent, FirstRand Group (FirstRand), one of the leading financial services groups in Africa.
RMBN is a wholly-owned subsidiary of FirstRand. Leveraging its membership of the Group, the bank has continued to harness the financial strength and global reach of the Group to support its corporate clients along the international trade value chains.
Positively, the evolution of the bank’s fully owned subsidiary (RMB Nigeria Nominees Limited), which was incorporated in January 2019, provided additional impetus for service/product diversification and earnings accretions.
However, these strengths are counterbalanced by the bank’s moderate market share within the Nigerian banking industry in terms of total assets, customer deposits, and loan portfolio, which is estimated at 0.4%, 0.2% and 0.2% respectively at FY20. Management & Governance is a neutral rating factor.
RMBN’s strong capitalisation is a key rating strength, with the capital adequacy ratio (CAR) consistently exceeding the regulatory threshold by a significant margin. As of FY20, CAR was robust at 47.5% (FY19: 50.1%), relative to the regulatory minimum of 10%, thus providing adequate headroom for loss absorption.
Similarly, GCR’s computed core capital ratio stood at 40.9% at FY20 (FY19: 50.2%) and expected to remain within a strong range over the next 12-18 months on the back of the bank’s solid internal capital generation and cautious risk asset growth.
However, earnings quality is a rating constraint, reflected by revenue stability risk characterised by high source concentration and material exposure to market-sensitive income, which has historically constituted over 40% of total operating revenue. That said, we expect the bank’s increased value proposition, and operational scale expansion to further support earnings diversification and accretion over the short to medium term.
RMBN’s risk position is sound and well contained, as evidenced by the nil NPL recorded since inception till date. Credit losses have also remained moderate at 0.6% at FY20 and broadly compared favourably with the industry average of c.2%.
Conversely, loan book concentration is assessed at an elevated level, with the twenty largest obligors constituting 99.7% of the loan portfolio at FY20. While loan concentration is typical of merchant banks in Nigeria, management anticipates a somewhat diversified loan portfolio over the short to medium term on the back of its recent loan book expansion strategy.
GCR is also cognisant of the bank’s significant exposures to market risk in view of the substantial market-sensitive income realised in FY20.
The bank’s funding structure is adequate, with the GCR long term funding ratio and stable funding ratio registered at 98.8% and 74% respectively at FY20. Customer deposits increased by 14.4% at FY20, largely driven by the bank’s improved low-cost deposits mobilisation capacity via its transactional banking platform, as well as leveraging partnerships with fintechs.
As a result, the relatively cheaper current deposits constituted a higher 52.8% of customer deposits at FY20 (FY19: 18.7%), thereby leading to 420bps moderation in the cost of funds to 4% at FY20. Analysis of the deposits book reflects high concentration risk, with the twenty largest depositors constituting 86.8% of customer deposits at FY20.
Positively, the bank’s liquidity position remains strong, with the regulatory liquidity ratio of 130% at FY20 relative to the regulatory minimum of 20%. Going forward, we expect the bank’s liquidity metrics to remain strong on the back of its highly liquid balance sheet.
The national scale Issuer ratings benefit from parental support. The bank is wholly owned by FirstRand, which is headquartered in South Africa, delivering finance solutions across nine key African countries, the United Kingdom and India. We believe FirstRand has the capacity to support the bank based on its sound financial profile and good geographic diversification.
Outlook statement
The stable outlook reflects GCR’s expectation that RMBN’s capitalisation metrics would remain strong on the back of its good internal capital generation and cautious risk asset creation. Asset quality metrics are anticipated to be maintained at sound levels, albeit with the loan portfolio concentration by obligor remaining high. We also believe funding and liquidity will remain stable and adequate.
Rating triggers
The rating could be upgraded if RMBN maintains capitalisation and asset quality metrics at strong levels on a sustainable basis and achieves loan book diversification. Conversely, a downward rating movement could be triggered by material deterioration in capitalisation and asset quality metrics.
