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RED FLAGS: Coronation Merchant Bank downgraded by Fitch due to weakened capital position



The Long-Term Issuer Default Rating (IDR) of Coronation Merchant Bank (CMB) has been downgraded by Fitch Ratings to ‘CC’ from ‘B-‘, with its Viability Rating (VR) also lowered to ‘cc’ from ‘b-‘.

In a note released on Monday, the rating agency said it also demoted the bank’s National Long-Term Rating to ‘B+(nga)’ from ‘BBB-(nga)’, raising some red flags that prompted its latest decision.

According to Fitch, CMB was moved down in the pecking order due to a “significantly weakened capital position”, which if not quickly addressed, “could lead to a material capital shortfall.”
Already, the financial institution is taking a step to bolster its capital base through a rights issue, as pointed out in the statement released by Fitch on November 20, 2023.

In the disclosure, which was seen by Business Post, it was Emphasized that the capital position of CBM, which it said was threatened, “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.”

Fitch further stressed that the Long-Term IDR of the company reflects its “view that a default on the bank’s senior obligations is probable in view of heightened FC liquidity risk,” adding that the bank’s “creditworthiness has weakened relative to that of Nigerian peers.”

Explaining why the capitalisation of CMB is weak, the rating firm said 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 affected the company.

It noted that this would likely impact negatively on the lender’s “ability to refinance large upcoming FC debt maturities.”

Fitch pointed out in the statement that last year, Coronation Merchant Bank reported a large net loss in the form of a negative return on average equity (ROAE) of 25 per cent as a result of negative net interest margins.

It stated that the negative net interest margins 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.

The firm noted that this action of the apex bank on the CRR, following its reduction 10 per cent from 32.5 per cent for merchant banks in July 2023, has continued to affect the bank’s earnings.

However, the rating company disclosed that the ratings of the merchant bank could be raised if its capital position improves and its FC liquidity risks eases.



Source: Businesspost