Nigeria’s Biggest Merchant Bank Eyes NGN25bn With Series XV & XVI CPs under its N100bn CP Programme

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Nigeria’s leading merchant bank, Coronation Merchant Bank (CMB) limited has announced the launch of its Series XV and XVI Commercial Paper (CP) Issuance under its N100 billion commercial paper issuance programme which will be between 180 and 268 days tenor with 7.25 per cent interest yield under the Series XV 180 days and 9.64 per cent for the Series XVI 268 days paper for a target amount of up to N25 billion in size.

The merchant bank in a disclosure on Friday revealed that the subscription will be opened on Wednesday, April 7 with the offer closing on 13th of April 2021 with a minimum subscription value of N5 million at a discounted rate of 7.00 per cent for the Series XV 180 tenor and 9.00 per cent for the Series XVI 268 days tenor. Also, the circulation of the fund allocation to investors on the same April 13 while the investors are scheduled to fund their commitment on 14th April.

“We are pleased to notify you of the launch of the Series XIII and XIV Commercial Paper Issuances by Coronation Merchant Bank Limited (“Coronation MB” or the “Bank”) under its N100 billion Commercial Paper Programme. The Issuance will be across 180 and 268-day tenors for a target amount of up to N25 billion.”

Coronation Merchant Bank further revealed in the disclosure that the CP issuance is free and clear of withholding taxes while the proceeds from the programme shall be used for the short term working capital requirements of the company.

The Issue

Coronation Merchant Bank Ltd. (CMB) was incorporated as a private limited liability bank in 1992 and obtained a discount house license from the Central Bank of Nigeria (CBN) in 1993. Following structural reforms in the Nigerian financial services sector, the company obtained CBN’s license to operate as a merchant bank in 2015. With a strategic decision to focus on core banking activities, Coronation MB divested from its two former subsidiaries (Coronation Asset management Ltd and Coronation Securities Ltd) in 2019. The primary activities of the company include trade finance, corporate and investment banking, wealth management, and treasury activities. The majority shareholder of Coronation MB is WAPIC Insurance Plc. which holds 22.80% of total shares outstanding as at 2020FY.

Coronation earns revenue from both interest and non-interest sources. In 2020FY, gross earnings fell by 12.12% YoY (to NGN27.36bn) dragged by the 20.49% dip in interest income. The sharp decline in interest income reflected the impact of the low yield environment on interest on investment securities. On the other hand, non-interest income grew by 22.72% YoY, buoyed by gains on investment securities and fee-based income. In 2021FY, we expect that the upward trend in interest rates will support interest income which will ultimately bode well for gross earnings. Also, the general improvement in business activities, relative to 2020FY, could potentially further sustain the momentum in fees income from both investment banking and trade financing activities (which jointly constitute over 65% of fees-related income in 2020FY). While foreign exchange gains may take a hit in 2021FY, its low contribution to gross earnings makes it rather negligible.

In 2020FY, operating income increased by 14.33% YoY, supported by the 26.11% YoY dip in interest expense. However, inflationary pressures in the economy contributed to the 13.56% YoY spike in the company’s operating expenses. Consequently, cost-to-income ratio declined only marginally by 34bps, staying at a low level of 51.23%. Furthermore, the high exposure of the bank to the agricultural and manufacturing sectors, which were adversely affected by the economic downturn in 2020FY, led to the 152.14% YoY spike in impairment charges. That notwithstanding, Profit from Continued Operations improved by 5.75% YoY to NGN5.04bn in 2021FY. Other than the effect of inflationary pressures, we do not envisage any deterioration in cost-to-income ratio in 2021FY. Also, we anticipate relatively modest impairment in 2021FY on the back of the improved business environment.

Given the short-term maturity of risky assets created by the bank (usually less than a year), Coronation MB has a strong liquidity position, giving us comfort over the bank’s ability to fulfil its short-term obligations. Also, the bank maintains a decent capital base with shareholder funds at NGN40.11bn as at 2021FY, well above the regulatory requirement of NGN15.00bn. Owing to the nature of its business, the bank has a high leverage (which currently stands at 10.28x). However, this does not pose any significant threat given its relatively strong brand and the quality of its capital. In addition, we note that the bank maintained zero non-performing loans in 2020FY.

Pricing and Recommendation

In evaluating the 180-day instrument, we considered the Treasury bill instrument with Days-to-Maturity of 176 days and yield of 4.34%. The instrument therefore offers a premium of 2.91%.

For the 268-day instrument, we considered the Treasury bill instrument with Days-to-Maturity of 281 days with a yield of 5.88%. The instrument is being offered at a premium of 3.76%.

Given the company’s credit rating [A- (GCR); B- (Fitch); A+ (Augusto)], liquidity position and general performance outlook, we consider the yield of 7.25% and 9.64% on both instruments attractive. Hence, we recommend a BUY on the offer.

Coronation Merchant Bank, as a Private Limited Liability Company, is duly licensed by the Central Bank of Nigeria as a Merchant Bank in Nigeria to provide financial services in treasury, investment banking and corporate banking to corporate, institutional investors and high-net-worth individuals. The Bank, a well-recognized brand and “A” rated entity by Augusto and GCR and B- by Fitch, has consistently delivered strong financial performance, with its asset base and shareholders’ funds at N412.36 billion and N40.11 billion respectively, as on 31st December 2020.