Fitch Downgrades Coronation Merchant Bank Credit 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-‘. In a statement, Fitch said it has also downgraded the merchant bank’s National Long-Term Rating to ‘B+(nga)’ from ‘BBB-(nga)’, adding that the ratings have been removed from Rating Watch Negative (RWN). In the note, Fitch said the downgrade of the VR reflects its 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. 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 its expectation that its creditworthiness might weaken further relative to that of Nigerian peers. According to Fitch, the bank National Ratings are the lowest among that of Fitch-rated banks in Nigeria, reflecting the bank’s weak capital position and heightened liquidity risks. The rating note revealed that Coronation Merchant Bank capitalisation has materially weakened as a result of the sharp depreciation of the naira since June 2023. Its financial strengthened worsened with 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. Analysts noted that 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. Unfortunately, the merchant bank has weak foreign currency in its vault. CMB’s merchant banking license results in a reliance on price- and confidence-sensitive funding. These include corporate deposits which accounted for 42% of liabilities in 2022, bank borrowings (21%) and commercial paper (another 2%). Fitch believes CMB’s ability to refinance large upcoming foreign currency debt maturities has diminished in view of its weakened capitalisation.  The merchant bank is in a loss-making position amidst uncertainties in the economic environment. In 2022, CMB reported a large net loss in 2022 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 with the apex bank. “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”, Fitch said. The merchant bank business profile is considered week, accounting for under 1% of Nigeria’s banking sector assets. Its merchant banking model is more affected by the CBN’s high CRR requirement than commercial banks, Fitch said.