Fitch Revises Coronation Merchant Bank's Outlook to Stable; Affirms IDR at 'B-'

(The following statement was released by the rating agency)
Fitch Ratings-London-14 December 2020:
Fitch Ratings has revised the Outlook on Nigeria-based Coronation Merchant
Bank Limited's (CMB) Long-Term Issuer Default Rating (IDR) to Stable from
Negative and affirmed the IDR at 'B-'. Fitch has also affirmed CMB's Viability
Rating (VR) at 'b-' and National Long-Term Rating at 'BBB (nga)'. A full list
of ratings is below.

The revision of the Outlook to Stable reflects Fitch's view of receding
near-term risks to the bank's intrinsic creditworthiness from the economic
downturn. In our view, the bank's Long-Term IDR has sufficient headroom at the
'B-' level to absorb moderate shocks from the difficult operating environment,
including heightened intervention and regulatory risks, and resulting risks to
its financial profile in 2021.
Key Rating Drivers
IDRs AND VR

CMB's Long- and Short-Term IDRs are driven by its standalone credit profile as
determined by its VR. The bank's VR reflects Nigeria's (B/Stable) challenging
and volatile operating environment, which influences CMB's financial and
non-financial rating factors.

The bank's business model and risk management has held firm during the past
few difficult quarters and has prevented asset-quality deterioration or
pressure on its funding and liquidity. CMB's lending has continued to grow
rapidly (up 45% yoy in 9M20), in line with high demand for imports and the
diversification of the bank's funding profile. The bank has not afforded any
debt relief to its clients and has not applied regulatory forbearance on its
loan classifications. However, given the likely impact of the economic shock
on businesses and the bank's high credit concentrations, there is a real risk
to its asset quality, unless economic recovery gathers pace.

CMB is a leading independent merchant bank in Nigeria and its company profile
has a high influence on its ratings, reflecting its niche and developing
franchise, potential for earnings volatility and structural funding and
liquidity weaknesses, given its reliance on short-term wholesale deposits and
market funding.

CMB's primary risk exposure is to short-term (up to one year) self-liquidating
corporate loans and traditional trade finance, and Nigerian treasury bills.
This is balanced by CMB's good management of credit and market risks.
Operational risk is inherent in the business but losses are low.

CMB has good asset quality, reporting zero impaired loans (IFRS 9 Stage 3) at
end-9M20, which has also been the case for the last four financial years. This
reflects the bank's lower risk business model and risk management capability.
The bank also has zero Stage 2 loans. However, asset quality is the main risk
to the bank because of very high borrower concentrations (top 20 loans
represented 97% of gross loans and 2x its equity at end-1H20) and significant
foreign-currency-denominated trade loans (forming 55% of total loans at
end-9M20).

CMB remained profitable in 9M20 with operating income being stable yoy, at
around 3% of risk-weighted assets, because of improving net interest income
(NII) and despite lower trading income. Interest income was affected by lower
yields on government securities, but NII held up thanks to the lower cost of
funding, a combination of lower rates and funding diversification. Fitch
expects earnings pressures to persist into 2021 because of weak macroeconomic
conditions. Profitability will be further pressured by moderately higher loan
impairment charges, reflecting some credit quality deterioration, in Fitch's
opinion.

CMB is adequately capitalised, reporting Tier 1 and total capital adequacy
ratios (CAR) of 14.9% and 15.4%, respectively, at end-9M20 (end-2019: 18.6%
and 19.2%, respectively). The pressure on capitalisation came from mainly
rapid risk- asset growth, and to a lesser extent, currency devaluation. CMB
recently concluded a Tier 2 debt issue which will strengthen its total CAR but
given the bank's aggressive growth strategy, its capital ratios are likely to
remain at current levels over the medium term.

Our assessment of capital also considers CMB's small absolute capital base,
which exposes the bank to even moderate capital eroding losses. Given its
business model, in the event of capital pressure we believe that CMB could
de-leverage its balance sheet, if needed.

CMB's funding structure is a relative rating weakness as the bank is funded
entirely by price- and confidence-sensitive wholesale funding, including
corporate deposits, short-term bank borrowings and commercial paper. Around
32% of CMB's non-equity funding was in foreign currency at end-9M20.

Corporate deposits are highly concentrated by name, with the top 20 deposits
forming over half of total deposits. Given the nature of its trade finance
business, the bank has a reliance on short-term foreign currency funding,
which could decline if sovereign risks rise, leading to pressure on foreign
currency liquidity. Balance sheet liquidity is underpinned by the short-term
nature of the bank's trade finance assets and large holdings of liquid assets.

The bank is highly liquid in local currency but conversion to foreign currency
is challenging under current market conditions. At end-9M20, highly liquid
assets in foreign currency (cash and interbank) covered short-term (less than
one month) foreign currency-liabilities (excluding contingent liabilities) by
about 40%.

SUPPORT RATINGS AND SUPPORT RATING FLOOR

Fitch believes that sovereign support to CMB cannot be relied on given
Nigeria's weak ability to provide support, particularly in foreign currency.
Therefore, the Support Rating Floor (SRF) of all Nigerian banks is 'No Floor'
and their Support Ratings (SRs) are '5'. This reflects our view that senior
creditors cannot rely on receiving full and timely extraordinary support from
the Nigerian sovereign if any of the banks become non-viable.

NATIONAL RATINGS

CMB's National Long- and Short-Term Ratings reflect its creditworthiness
relative to other issuers in Nigeria. The ratings reflect the bank's niche
company profile and vulnerability of the business to exogenous shocks.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating
action/upgrade:

Upside for ratings is currently limited given difficult operating conditions
and risks to funding and liquidity due to market volatility.

Factors that could, individually or collectively, lead to negative rating
action/downgrade:

The most immediate downside risk to CMB's ratings is any material
deterioration in asset quality given its high borrower concentrations, that
significantly erodes capital buffers. Tightening foreign currency liquidity
mainly due to adverse market conditions and reduced access to foreign currency
funding could be negative for the bank's ratings.

A strategic shift towards higher-risk exposures or increased concentrations
could also result in a downgrade, although this is not our base case given the
bank's consistent strategy to date and growing customer base.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond
issuers have a best-case rating upgrade scenario (defined as the 99th
percentile of rating transitions, measured in a positive direction) of three
notches over a three-year rating horizon; and a worst-case rating downgrade
scenario (defined as the 99th percentile of rating transitions, measured in a
negative direction) of four notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on
historical performance. For more information about the methodology used to
determine sector-specific best- and worst-case scenario credit ratings, visit
[https://www.fitchratings.com/site/re/10111579]
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 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. For
more information on Fitch's ESG Relevance Scores, visit
www.fitchratings.com/esg

Coronation Merchant Bank Limited; Long Term Issuer Default Rating; Affirmed;
B-; Rating Outlook Stable
; Short Term Issuer Default Rating; Affirmed; B
; Local Currency Long Term Issuer Default Rating; Affirmed; B-; Rating Outlook
Stable
; National Long Term Rating; Affirmed; BBB(nga)
; National Short Term Rating; Affirmed; F3(nga)
; Viability Rating; Affirmed; b-
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF

Contacts:
Primary Rating Analyst
Mahin Dissanayake,
Senior Director
+44 20 3530 1618
Fitch Ratings Ltd
30 North Colonnade, Canary Wharf
London E14 5GN

Secondary Rating Analyst
Kurt Boere,
Senior Analyst
+44 20 3530 2707

Committee Chairperson
Olga Ignatieva,
Senior Director
+7 495 956 6906

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email:
louisa.williams@thefitchgroup.com

Additional information is available on www.fitchratings.com
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