Nigeria’s first credit Rating Agency and a pan African leader in credit reports, Agusto & Co. limited has assigned an “Aa-” rating to Rand Merchant Bank.
The rating assigned to Rand Merchant Bank Nigeria Limited (“RMBN” “the Bank”) reflects the Bank’s good profitability, good asset quality, good capitalization for current business risks and good liquidity, with operations driven by an experienced management team. The Bank’s profile is further buoyed by demonstrated support from its parent company, FirstRand Limited in various capacities, spanning risk management, customer referrals and liability generation. The Bank’s rating is however constrained by lingering concentration risks in its loan portfolio and its funding profile, as well as the lull in the macroeconomic environment in which it operates.
Following a return to profitability in 2017, the Bank’s profits further strengthened in 2018 with a pre-tax profit of approximately ₦10 billion, 37.2% higher than the prior year and translating to returns on average assets and average equity of 5.3% and 29.7% respectively. Profit was upheld by expanding earning streams. These include its core lending business, investments in government securities, transaction-tied advisory, as well as foreign exchange trading which buoyed contributions of the Bank’s global markets business division. Overall, profitability stood good despite interest expense on deposits and borrowings accounting for 67.8% of interest income, given the funding restrictions of the merchant banking space and concurrent high cost of funds from rate-sensitive corporates.
Given RMBN’s improved earnings and strengthened profitability profile, as well as its good liquidity track record, we hereby upgrade the Bank’s rating to “Aa-”, reflective of a financial institution of very good financial condition and strong capacity to meet its obligations.
Merchant banks re-emerged with a review of regulatory guidelines governing the Nigerian banking industry in 2010. Subsequently, the merchant banking space has witnessed significant growth and emergence of new players, bringing the total number of such licensed banks currently operating in Nigeria to five. Restrained from retail deposits by the regulation requiring minimum deposits of ₦50 million per tranche, their customer base has implicitly been restricted to rate-sensitive corporates, high net worth individuals and other financial institutions, for liability generation. Thus, funding costs are behaviourally higher than that of commercial banks, while deposits are comparatively more volatile. Merchant banks nonetheless continue to leverage the malleability of their operating license to optimise income – spanning investment banking activities which include asset management, advisory
& structuring, corporate finance, to mention a few. This in addition to traditional commercial banking activities. Whilst return on equity for most merchant banking operators currently stands below than of commercial banks at sub-20%, capitalisation and asset quality remain comparatively better.