The rating assigned to FSDH Merchant Bank Limited (‘FSDH’ or ‘the Bank’) is underpinned by good capitalisation, good liquidity, good profitability and an experienced management team. The rating is however constrained by a concentration in the loan book, inflexible funding and the fragile state of the Nigerian economy.
During the 2018 financial year, FSDH’s profitability strengthened considerably on account of lower funding costs, improvements in asset quality which led to writebacks of loan provisions and moderated operating expenses despite inflationary pressures. Profit before taxation increased by 34.4% to ₦5.2 billion, the highest in the Bank’s history. Pre-tax return on average assets (ROA) and pre-tax return on average equity (ROE) also strengthened to 3.5% (2.7%) and 17.8% (FY 2017: 14.9%) respectively. These profitability ratios are also the best the Bank has recorded since its transition to a merchant bank and were at the upper end of its peer group.
On account of improvement in asset quality and profitability, while maintaining sufficient levels of capitalisation, we hereby upgrade the rating assigned to FSDH Merchant Bank Limited to “A”.
The merchant banking space has witnessed significant growth in the last few years, following the review of regulatory guidelines for the Nigerian Banking Industry in 2010. Specifically, merchant banking licenses allows its holder engage in investment banking activities which incorporate asset management, advisory & restructuring, corporate finance, to mention a few, in addition to traditional commercial banking activities.
Given sustained pressure on fund-based interest margins, the operating strategy of most banks has been streamlined to growing non-interest income. This is favourable for merchant banks which leverage the malleability of the license to optimise earning streams.