Final Rating Report - FMDQ Group · During the 2017 financial year , FBNQuest Merchant B ank maintained local banking relationships with First Bank of Nigeria Limited, Guaranty Trust

FBNQuest Merchant Bank Limited

Final Rating Report

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2015 Developmental Financial Institution Rating FBNQuest Merchant Bank Limited

FBNQuest Merchant Bank Limited

A financial institution of good financial condition and strong capacity to meet its obligations.

Rating Assigned:

A

Outlook: Stable

Issue Date: 18 July 2018

Expiry Date: 30 June 2019

Previous Ratings: A

Industry: Banking

Analysts:

Ada Ufomadu

[email protected]

Yinka Adelekan

[email protected]

Agusto & Co. Limited

UBA House, (5th Floor)

57, Marina

Lagos

Nigeria

www.agusto.com

RATING RATIONALE

The rating assigned FBNQuest Merchant Bank Limited (‘FBNQuest MB’ or ‘the Bank’)

reflects the Bank’s affiliation with FBN Holdings, the non-operating holding company of

one of the largest banking and financial services organisations in Africa with an asset

base of ₦5.2 trillion ($15.7 billion @ ₦331/$) as at 31 December 2017. FBNQuest MB

was the fourth largest merchant bank in Nigeria by total assets and contingents, but

ranked first on local currency deposits as at FYE2017. The Bank has an experienced and

stable management team which provides oversight of its daily operations. The rating

recognises FBNQuest MB’s good capitalisation and good profitability during the period,

supported by its acceptable asset quality, investment banking expertise and trading

activities. However, FBNQuest MB’s rating is constrained by concentration in its loan

portfolio which renders it vulnerable to adverse changes in the performance of its

obligors and lending sectors.

FBNQuest MB commenced merchant banking business in November 2015 following 20

years of operations as a discount house and has continuously sought avenues to boost

product offerings and grow market share. Thus, the Bank strategically acquired two

entities – FBNQuest Asset Management and FBNQuest Securities in 2017, leveraging

synergies in the FBNQuest group to increase its product base and capitalise on corporate

& investment banking opportunities within the group. FBNQuest MB’s loan book has

grown steadily since its conversion to a merchant bank. However, in 2017, on account of

the weak operating climate and the Bank’s cautious stance to loan growth, a 6.2%

contraction was recorded in the loan portfolio year on year to ₦39.6 billion. FBNQuest

MB’s non-performing loans as a percentage of gross loans at 3.2% was below the

regulatory threshold of 5% and the banking industry average of 9.5% in the review year.

In 2018, the Bank plans to grow its loan portfolio to ₦60 billion utilizing proceeds from

its proposed bond issuance and other borrowings. Though this level of growth may be

difficult in the current year given ongoing preparations for the 2019 elections, we believe

2

The Bank of Industry FBNQuest Merchant Bank Limited

2018 Credit Rating

that should the bond be issued, there are bankable projects that the funds can be

deployed in the short term. However, we recognise the need to maintain a good risk

management framework to accommodate the projected growth while minimising losses

associated with the expansion.

FBNQuest MB is well capitalised for its business risks as a merchant bank. The Bank’s

shareholders’ funds stood at ₦26.3 billion as at FYE2017 (FYE2016: ₦29 billion) and

translated to a Basel II Capital adequacy ratio (CAR) of 15.37%, comfortably above the

CBN regulatory minimum of 10%. The Bank’s core capital declined by 9.1% during the

review period, due to dividend payments amounting to ₦8.7 billion, 213% above the

Bank’s after tax profit in 2017. Applying the IFRS 9 accounting standard which

commenced in January 2018, FBNQuest MB’s CAR declined marginally to 15.58% as at

Q1, 2018. We consider the Bank’s capitalisation ratios to be good.

FBNQuest MB maintained a good liquidity profile with liquid assets to total LCY deposits

at 61% as at FYE2017, well above the regulatory liquidity ratio minimum of 20%, though

lower than the prior year’s 63.1%. Contributing to the decline in the Bank’s liquid assets

were major investments made during the year such as the acquisition of its two

subsidiaries, the purchase of a computer software and other financial investments. In

addition, the Bank was charged regulatory cash reserve requirements (CRR) by the Central

Bank of Nigeria (CBN) for the first time since its conversion to a merchant bank.

Nonetheless, the Bank’s good liquidity profile continues to be sustained by its sizeable

portfolio of government securities in the available for sale (AFS) and held to maturity

(HTM) categories. FBNQuest MB’s ability to refinance in the domestic market is good,

upheld by its membership of the FBN Group.

During the review year, FBNQuest MB’s profitability improved marginally on the back of

high interest rates on earning assets as the full year impact of the rise in the Monetary

Policy Rate (MPR) was seen in 2017. In addition, the Bank leveraged its investment

banking and trading expertise as well as volatilities in the fixed income market to boost

non-interest income. This resulted in a 50.1% rise in non-interest income during the

period. However, rebranding and restructuring activities in the Bank and investments in

technology increased FBNQuest MB’s operating costs, leading to a 1730bps rise in cost

to income ratio (CIR) to 56.5%. Nonetheless, key profitability indicators such as pre-tax

return on equity (ROE) and return on assets (ROA) strengthened to 17.9% and 3.6%

respectively, largely on the back of a smaller equity base. Unaudited accounts for the

period ended 31 May 2018, showed improved annualised pre-tax ROA and ROE of 5%

and 25.7% respectively. We consider FBNQuest MB’s profitability to be good.

In our opinion, the outlook for the Bank is stable and we hereby assign an ‘A‘ rating to

FBNQuest Merchant Bank Limited.

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2018 Credit Rating

Table 1: Financial Data

December

2015

December

2016

December

2017

Total Assets & Contingents ₦106.5 billion ₦137.7 billion ₦138.7 billion

Total Local Currency Deposits ₦67.6 billion ₦61.4 billion ₦82.3 billion

Net Earnings ₦6.1 billion ₦8.1 billion ₦11.4 billion

Return on Average Assets &

Contingents (ROA)

3.8% 4.0% 3.6%

Return on Average Equity (ROE) 17.0% 17.3% 17.9%

•Membership of the FBNH Group

•Experienced and stable management team

•Good profitability

•Good liquidity profile

•Good capitalisation levels

Strengths

•Concentration in loan book.

•High dividend pay-out ratio in the review period.

Weaknesses

•Managing rising operating costs associated with expansion and investments in technology.

•Increasing competition in the merchant banking space and entire banking industry.

•Maintaining good asset quality in a fragile economy.

Challenges

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2018 Credit Rating

PROFILE

FBNQuest Merchant Bank Limited (“FBNQuest MB” or “the Bank) is a wholly owned subsidiary of FBN Holdings

Plc, the non-operating financial holding company of one of the largest banking and financial services

organisations in Africa with a total asset size of ₦5.2 trillion ($15.7 billion @ ₦331/$) as at 31 December 2017.

Incorporated in February 1995 as Kakawa Discount House, FBNQuest MB has transformed its operations as a

discount house to a merchant bank following CBN’s approval in May 2015. Shortly after the Bank commenced

merchant banking operations in November 2015, FBN Holdings Plc unveiled “FBNQuest”, a unified brand name

for the merchant banking and asset management businesses of FBN Holdings Plc. The businesses include

FBNQuest Merchant Bank Limited, FBNQuest Capital Limited, FBNQuest Securities Limited, FBNQuest Asset

Management Limited, FBNQuest Trustees Limited and FBNQuest Funds Limited.

In August 2017, FBNQuest Merchant Bank Limited acquired 100% interest in two entities: FBNQuest Securities

and FBNQuest Asset Management Limited, to form the FBNQuest Merchant Bank Group. This strategic synergy

is aimed at expanding the Bank’s product offerings to generate retail deposits and growing revenue base

ultimately. FBNQuest MB’s principal activities are:

o Provision of finance and credit facilities to customers

o Provision of treasury management services

o Trading & holding Federal Government of Nigeria (FGN) bonds and other money market activities

o Dealing & provision of foreign exchange services

o Financial consultancy & advisory services

o Issuing House services and portfolio management

FBNQuest MB’s deposit liabilities are largely generated from high net worth individuals (HNIs), corporates and

financial institutions while risk asset creation is targeted at industrial & mid-tier corporates, value chain

propositions, public sector entities, banks and non-bank financial institutions.

FBNQuest MB’s core banking business is carried out through four divisions:

o Coverage & Corporate Banking in charge of risk asset creation and liability generation

o Investment Banking which handles debt solutions, equity & debt capital markets, financial advisory

o Fixed Income, Currency & Treasury (FICT) covering general treasury activities

o Sales Management responsible for liability generation and distribution of the Bank’s products and

services

In addition to these core divisions, FBNQuest has support units such as General Services and Operations &

Technology.

FBNQuest MB’s head office is located at 10 Keffi Street, Off Awolowo Road, Ikoyi, Lagos and operates two other

branches in Port-Harcourt and Abuja.

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2018 Credit Rating

Subsidiaries

FBNQuest Merchant Bank Limited has two subsidiaries - FBNQuest Asset Management (with assets under

management of about ₦248 billion as at June 2018) and FBNQuest Securities Limited. As at 31 December

2017, total investment in subsidiaries stood at ₦1.7 billion.

Table 2: FBNQuest Merchant Bank Subsidiaries

Name of Subsidiary Principal Activities % Equity

FBNQuest Asset Management Limited Fund & Portfolio Management 100%

FBNQuest Securities Limited Stock Broking & Issuing House Operations 100%

Information Technology (IT)

FBNQuest Merchant Bank Limited deploys a range of software, hardware, communication solutions and other

computer applications in its daily operations. The Bank uses the Finacle software for its core & treasury

activities and has external interfaces through which it connects with other banks and the CBN in carrying out

some of its functions. Such extranets include Bloomberg and the CBN- S4/RTGS Services, to mention a few.

Other software applications used by the Bank are highlighted below:

o SalesForce: A customer relationship management system

o Clirec: A bank reconciliation software

o SWIFT: Handles transfer of cash and securities between financial institutions

o Fixed Asset Register: For fixed assets registration in terms of capitalization, disposal and depreciation

Hardware applications include sun servers, HP Compaq servers and other personal computers.

Correspondent Banks

During the 2017 financial year, FBNQuest Merchant Bank maintained local banking relationships with First

Bank of Nigeria Limited, Guaranty Trust Bank Plc and Sterling Bank Plc and foreign correspondent banking

relationships with Access Bank UK, Bank of Beirut, FBN Bank UK and FCMB UK during the review period.

Track Record of Performance

Since conversion to a merchant bank in November 2015, FBNQuest Merchant Bank Limited has grown its asset

base at a CAGR of 14% to ₦138.7billion as at 31 December 2017. Gross loans & advances stood at ₦39.6

billion as at the same date, reflecting a 6.2% contraction on prior year, due to the weak macroeconomic

environment. Approximately 3.2% of the Bank’s loan book was impaired as at FYE2017; below the CBN

regulatory threshold of 5%.

FBNQuest MB’s shareholders’ funds stood at ₦26.3 billion as at FYE2017 and was its lowest since it

commenced the merchant banking business, on account of a high dividend pay-out during the year. However,

capital adequacy ratio (CAR) measured using the Basel II tenants stood at 15.73%, above the regulatory

minimum of 10% for merchant banks. FBNQuest MB’s profitability ratios such as pre-tax return on average

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2018 Credit Rating

assets (ROA) and pre-tax returns on average equity (ROE) have averaged 3.8% and 17.4% respectively in the

last three years.

CURRENT DIRECTORS POSITION Shareholding (%)

Mallam Bello Maccido Chairman Nil

Mr. Kayode Akinkugbe Managing Director Nil

Mr. Taiwo Okeowo Deputy Managing Director Nil

Dr (Mrs) Omobola Johnson Non-Executive Director Nil

Mr. U.K Eke Non-Executive Director Nil

Mr. Babatunde Odunayo Non-Executive Director Nil

Mr Akin Osinbajo* Independent Director Nil

Mr. Oluyele Delano Independent Director Nil

*Appointed Non-Executive Director effective January 2017

MANAGEMENT TEAM Mr. Kayode Akinkugbe is the Managing Director/Chief Executive Officer of FBNQuest Merchant Bank Limited.

Prior to this appointment, Mr. Akinkugbe served as Deputy Managing Director and then Managing Director/CEO

of FBN Capital Limited. His investment banking career spans over 24 years in both global and local financial

institutions. This includes being Head of sub-Saharan Africa (ex-SA) Coverage at Deutsche Bank and Credit

Suisse. Mr. Akinkugbe holds a first degree in Economics from the University of Ibadan, an MSc in International

Accounting & Finance from the London School of Economics, UK and an MBA from Cranfield University, UK.

Mr. Taiwo Okeowo is the Deputy Managing Director of FBNQuest Merchant Bank Limited. Mr. Okeowo’s

investment banking career spans over 27 years. He was Deputy Managing Director of FBN Capital prior to this

appointment. Mr. Okeowo holds an MSc in Management from London Business School, is a CFA Charter holder

and a Fellow of the Institute of Chartered Accountants of Nigeria.

Other members of FBNQuest Merchant Bank’s management team include:

Mrs Bimbola Wright Head, Coverage and Corporate Banking Group

Mr. Patrick Mgbenwelu Head, Debt Solutions

Mrs. Funke Ladimeji Head, Operations & Technology

Mr. Taiwo Gabriel Chief Risk Officer

Mrs. Adetoun Dosunmu Acting Head, Fixed Income, Currencies & Treasury Group

Mrs. Emily Atebe Chief Financial Officer

Mr. Alawusa Adewuyi Company Secretary

Mr. Tseyi Hammond Head, Sales & Wealth Management

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2018 Credit Rating

ANALYSTS’ COMMENTS

ASSET QUALITY

As at 31 December 2017, FBNQuest Merchant Bank’s total assets & contingents stood at ₦138.7 billion

(FYE2016: ₦137.7 billion), ranking it the fourth largest merchant bank in Nigeria1. The Bank’s assets remained

concentrated in liquid assets which accounted for 43.2% of total assets, reflecting its prior operations as a

discount house as well as favourable yields on risk free government securities during the period. However,

liquid assets shrunk by 22% year on year to ₦60 billion as the Bank deployed its assets to other strategic

investments such as the acquisition of two subsidiaries: FBNQuest Asset Management and FBNQuest Securities,

the purchase of a computer software (which cost ₦2 billion) and a corporate bond to diversify its earnings

base. Furthermore, during the review period, FBNQuest was charged the regulatory Cash Reserve Requirement

(CRR) of ₦2.2 billion (FYE2016: nil) for the first time since its conversion to a merchant bank.

Given the weak macroeconomic climate that characterised the 2017 financial year, gross loans & advances

contracted by 6.2% to ₦39.6 billion and made up 28.5% of the Bank’s asset base. When we factor in the 7.85%

naira devaluation2 during the review period, the loan book contracted by an estimated 7.2% as approximately

13.5% of gross loans & advances were dollar denominated as at FYE2017.

FBNQuest MB’s lending strategy continues to focus on mid-tier corporates and financial institutions, targeting

top names in these markets. As at 31 December 2017, credits to the manufacturing sector accounted for about

a third of the Bank’s loan book and were granted to obligors in various sub sectors such as food, metal and

textile manufacturing, reducing any probable concentration risk in lending to the sector. During the review

period, FBNQuest MB increased exposure to the oil & gas sector by 10%; subsequently, oil & gas credits

accounted for 28% of gross loans & advances as at FYE2017, above our benchmark of 20%. While we

acknowledge that the naira devaluation contributed minimally to loan growth to this sector; we are of the

opinion that this level of concentration renders the Bank vulnerable to adverse changes in the performance of

the sector. Credit to the agriculture and transport & storage sectors rose significantly year on year as a result

of opportunities in the sectors and reflected a low base effect from the prior year. With the exemption of these

three sectors analysed above, loans to all other sectors contracted in 2017 given the weak macroeconomic

environment which dominated the review period.

1 As at FYE2017, there were five licensed merchant banks operating in Nigeria 2 In 2017, there was a depreciation of the reporting USD/NGN exchange rate from ₦305/$ to ₦331/$

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2018 Credit Rating

Figure 1: Loan Book by Sector (FYE2017)

Figure 2: Loan Book Growth by Sector (FYE2017)

As is typical of most merchant banks in Nigeria, FBNQuest MB’s loan book showed concentration by sector and

obligor. The merchant banking license limits its users to wholesale (non-retail) banking; hence a higher level

of concentration relative to commercial banks. As at FYE2017, FBNQuest MB’s top three lending sectors

(Manufacturing, Oil & Gas and Construction & Real Estate) collectively accounted for 76% (FYE2016: 75%) of

the loan book while top 5 obligors accounted for 55.4% (FY2016: 59.2%) of gross loans & advances. The Bank’s

vulnerability to these obligors and sectors remain a concern and a negative rating factor.

We note positively the Bank’s efforts in adhering to internal sectorial limits and the internal ratings of its

obligors which classifies 62% as investment grade; however, we are of the opinion that some of these ratings

are copious in view of the current operating environment in Nigeria. We expect concentration to persist in the

Agriculture

9%

Construction &

Real Estate

15%

Information &

Communication

6%

Financial

Institutions

3%Oil & Gas

28%

Transport &

Storage

4%

Manufacturing

33%

Others

2%

-100%

-53%

-50%

-35%

-12%

-6%

10%

479%

over 1000%

Government

Financial Institutions

Others

Information & Communication

Manufacturing

Construction & Real Estate

Oil & Gas

Transport & Storage

Agriculture

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2018 Credit Rating

short to medium term.

FBNQuest Merchant Bank’s non-performing loans declined by 14% to ₦1.3 billion in 2017 due to repayments

and write-offs. As at FYE2017, only one of the Bank’s loans (in the real estate & construction sector) was

delinquent. The loan which is guaranteed by the Federal Government of Nigeria has been fully provided for

and is expected to be repaid in the near term following discussions with related parties. FBNQuest MB’s non-

performing loans to gross loans reduced to 3.2% from 3.4% in the prior year and compared favourably with the

CBN’s regulatory threshold of 5% as well as the Industry’s average of 9.5% in the same period. Compared to

select industry peers, FBNQuest MB’s NPL ratio was lower than FSDH Merchant Bank’s 11.6%, but higher than

Coronation Merchant Bank’s nil NPL ratio as at FYE2017. Subsequent to year end, the Bank’s NPL ratio rose

marginally to 3.6% as a result of a smaller loan book as at May 2018.

Figure 3: NPL Ratios (FBNQuest MB versus Peers)

Loan loss provisions as a percentage of non-performing loans (coverage ratio) stood at 34.2% in 2017, 190bps

lower than the preceding year. When we factor in regulatory risk reserves of ₦1.8 billion, the Bank’s impaired

loan is fully covered by 177.5%. Subsequent to year end, FBNQuest MB’s coverage ratio (excluding regulatory

risk reserves) increased markedly to 109.1% due to higher provisioning, following the implementation of IFRS

9 accounting standards.

Figure 4: Impaired Loans and Coverage Ratio (FBNQuest MB versus peers)

3.2%

11.6%

0.0%

9.5%

FBNQuest MB FSDH MB Coronation MB Industry Average

1.3

4.7

0.0

34.2%

71.8%

0.0% 0.0%

20.0%

40.0%

60.0%

80.0%

0.0

1.0

2.0

3.0

4.0

5.0

FBNQuest MB FSDH MB Coronation MB

%

In b

illi

on

s o

f N

aira

Impaired Loans Coverage Ratio

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2018 Credit Rating

We consider FBNQuest MB’s asset quality to be acceptable by Industry standards. The Bank plans to grow its

loan book by an estimated 52% to ₦60 billion by the 2018 financial year end, focusing on short dated

transactions and medium tenured credits for select names. We believe that this growth may be overly ambitious

given lingering weaknesses in the economy and ongoing preparations for the 2019 elections which typically

slows down economic activities in the country. In addition, short dated transactions tend to understate the size

of the Bank’s loan book at the end of the period. Notwithstanding, we expect FBNQuest MB to maintain a

healthy loan book with an NPL ratio lower than the regulatory threshold, barring any deterioration of its top

exposures.

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2018 Credit Rating

RISK MANAGEMENT

FBN Holdings, the Holding company under which FBNQuest MB operates has a centralized risk management

framework that identifies and manages the whole universe of inherent and residual risks facing the Group. In

addition to this, FBNQuest MB has an independent risk management function within the merchant banking

group that provides an additional layer of risk management. Over the years, the Bank has detailed its approach

to risk through various policies and procedures which include the following:

o Enterprise Risk Management Framework Policy o Risk Asset & Acceptance Criteria (RAAC) Policy

o Credit Risk Principles and Policy o Collateral Policy

o Market & Liquidity Risk Policy o Operational Risk Policy

o Concentration & Tenor Limit Policy o Business Continuity Management (BCM) Policy

o Performance Management Framework o Code of Conduct Policy

o Compliance policy o Standard Manual of Operations

These policies are subject to review at least a year but more frequent reviews may be conducted in the opinion

of the Board when changes in law, regulations, market conditions or the Group’s activities are material enough

to impact on the continued adoption of these policies.

FBNQuest MB identifies exposure to four major risks: market risk, liquidity risk, credit risk and operational risk.

Credit Risk: FBNQuest MB’s specific credit risk objectives are contained in the Risk Asset & Acceptance Criteria

(RAAC) and credit risk policy. The Bank’s credit rating model is defined by its RAAC and deals with all credit

risk counterparties, covering credit exposures to corporates, commercial, conglomerate and multinationals.

Obligor ratings are handled by relationship mangers with further review by Risk Management and Control

(RMC) before going through an approval process.

According to FBNQuest MB’s internal rating model, approximately 62% of loans & advances was granted to

investment grade obligors while 23% were to speculative grade names as at 31 December 2017. The balance

of 15% were unrated as at the same date. In our opinion, a few of these rating are quite optimistic, given the

current macroeconomic environment and specific challenges facing key economic sectors operating within the

country.

Figure 5: Loan Portfolio by Rating (FYE2017)

Unrated

15%

A

48%

AAA

13%

B

9%

BB

9%

BBB

1%CCC

5%

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2018 Credit Rating

We note positively the Bank’s low NPL ratio of 3.2% in the 2017 financial year which stood below the regulatory

threshold of 5% and the Industry’s average of 9.5%. However, we believe that obligor and sector concentration

in the Bank’s loan book threatens asset quality given the weak (though recovering) macroeconomic

environment. For this reason, it is imperative that FBNQuest MB proactively manages credit risk while providing

sufficient buffer in the event that operating conditions move against its obligors. According to the Bank, about

85% of its loans were secured using various forms of collateral such as equitable charge over landed property,

negative pledges, corporate & bank guarantees, deed over assets and cash as at FYE2017. In addition, some of

the assets financed especially in the transport & storage sector were pledged as collaterals.

Market Risk: The Bank’s trading and non-trading books are impacted by changes in interest rates and exchange

rates which exposes it to pricing and currency risks. FBNQuest MB adopts methods such as scenario analysis,

statistical analysis and position & loss limits in measuring market risks and uses internal models such as the

Value at Risk (VaR) and Earnings at Risk (EaR) to compute this risk. Daily stress testing is carried out on the

Bank’s trading portfolio and FBNQuest MB has two years of observable data which is back tested monthly.

The Bank’s Risk Management & Control (RMC) department monitors to ensure compliance with set limits and

controls. In addition, trading books are marked to market weekly by the RMC and exceptions are reported to

management based to set triggers.

Liquidity Risk: FBNQuest Merchant Bank manages liquidity risks through its Asset & Liability Committee (ALCO)

using the following methods:

o Maintenance of minimum levels of liquid and marketable securities above the regulatory requirement

of 20%. As at 31 December 2017, FBNQuest MB’s liquidity ratio stood at 61%.

o Using historical cash flow trends to forecast deposits and withdrawals

o Monitoring deposit concentration and ensuring diversification of funding sources.

o Maturity gap analysis

o Contingency funding plan

Operational Risk: FBNQuest MB uses the Basic Indicator Approach (BIA) to measure operational risk. The Bank

has approximately three years internal loss data and has recorded some losses due to operational risks in the

past. In the year ended 31 December 2017, FBNQuest MB was fined ₦75,000 for late submission of FinA returns

on three occasions. Though minimal, we believe that the Bank’s operational risk management needs to be

fortified to forestall losses particularly in view of the Bank’s digitalisation expansion. Cyber risk is another

rising concern in the banking industry that needs to be addressed in the Bank’s growth plan.

We consider FBNQuest MB’s risk management framework to be good for its current level of business risk as a

merchant bank.

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2018 Credit Rating

EARNINGS

In the financial year ended 31 December 2017, FBNQuest Merchant Bank’s gross earnings rose by 48.4% to

₦24 billion and was upheld by high interest rates on its loan and investment portfolios as well as volatility in

the fixed income market which bolstered non-interest income. FBNQuest MB’s earnings were predominantly

generated from its core banking business (net revenue from funds) which accounted for 56.3% of earnings,

lower than 59% the prior year. Foreign exchange income moderated due to a milder 7.85% naira devaluation

that occurred during the year compared to 35% naira devaluation in 2016. Commissions, fees and other income

improved year on year to account for a higher 42.3% of gross earnings (FY2016: 30.0%) supported by brokerage

& structuring fees and trading activities.

Figure 6: Breakdown of Earnings (FY2016 & FY2017)

In 2017, FBNQuest MB’s interest income rose by 47.9% to ₦19 billion on account of the full year impact of the

increase in MPR which was effected in July 2016. In addition, tight liquidity in the system during the period

resulted in elevated interest rates and subsequent re-pricing on maturing loans. Although the Bank’s loan book

contracted by 6.2% year on year, interest income from loans & advances to customers increased by 63% and

made up 44.9% of total interest income. Interest earned on investment securities also strengthened by 39.1%

from the previous year and reflected attractive yields on government securities during the review period.

FBNQuest MB’s interest expense increased by 47.8% to ₦12.1 billion in 2017 and was driven by a rise in

interest paid on customer deposits. Besides the 35.2% growth in customer deposits during the year, interest

expense was particularly impacted by the re-pricing of deposits (which are typically held by rate sensitive

Pension Fund Administrators and large corporates) due to competitive yields on government securities.

Notwithstanding, the Bank’s Net Interest Spread (NIS) was at par with the prior year at 36.2%, and better than

FSDH’s NIS of 34.9% and Coronation’s 34.1% in the same period.

During the review year, FBNQuest MB charged-off ₦471.4 million from its income statement as loan loss

expense. The charge-off was on account of an impairment on a non-financial asset (WHT receivables). The

59.0%

11.0%

30.0%

56.3%

1.4%

42.3%

Net Revenue From Funds Foreign Exchange Fees, Commissions & Other

Income

FY2016 FY2017

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2018 Credit Rating

Bank’s loan loss expense represented 2.5% of interest income and compared favorably with FSDH’s 11.4%, but

was worse than Coronation’s 0%.

During the review period, non-interest income from secondary activities in FBNQuest MB’s corporate &

investment banking business and treasury rose by 50.1% to ₦4.9 billion and was dominated by brokerage and

structuring fees which grew by 48% to account for 69% of non-interest income. Income reported from this line

captured the full year operations of the Bank’s investment banking arm as against the half year performance

in 2016. We expect this income stream to remain a significant non-interest revenue generating line for the

Bank given its competitive advantage and dominance in the investment banking space. Income from trading

activities contributed 16% to the Bank’s non-interest income during the period and comprised net gains on

trading financial assets at fair value through profit and loss (FVTPL). We anticipate sustained income in this

line in 2018 given persistent volatility in the fixed income market. Although we envisage some level of

depreciation of the domestic currency, we do not foresee substantial revaluation gains given that the Bank’s

FCY balance sheet is relatively small. Overall, we consider FBNQuest MB’s auxiliary income to be sustainable

in the near term.

Figure 7: Non-interest Income Breakdown (FY2017)

FBNQuest MB’s operating expenses (OPEX) more than doubled in 2017 to ₦6.4 billion. The 102.9% OPEX

growth recorded during the period was driven by the full year effect of the acquisition of FBNQuest Asset

Management and FBNQuest Securities which increased staff strength. Consequently, staff cost rose by 127.3%

to ₦2.8 billion and made up a significant 43% of operating expenses. Other operating expenses which largely

comprised licence fees, payments to the Nigerian Deposit Insurance Corporation (NDIC) on deposits and

administrative & general expenses grew by 62.1% year on year (higher than the closing inflation rate of 15.37%

as at December 2017) and was driven by the Bank’s rebranding and restructuring activities. FBNQuest MB’s

cost to income ratio (CIR) spiked to 56.5% and compared less favourably with FSDH MB (53.7%) and Coronation

MB (51.5%), though better than the Industry’s average of 66.1%. Subsequent to year end, FBNQuest MB’s CIR

improved to 49.5% as at May 2018. The Bank’s management projects a moderated CIR of 50-55% by end of

2018 on the back of better net earnings. We believe this is achievable.

Credit related

fees

6%

Brokerage &

Structuring fees

69%

Letters of credit

commissions &

fees

5%

Other fees &

commissions

1%

Trading

Income

16%

Foreign

Currency

Translation

3%

15


2018 Credit Rating

Figure 8: Efficiency & Profitability Ratios (FBNQuest MB versus Peers)

FBNQuest MB’s pre-tax profits strengthened marginally to ₦4.1 billion and translated to a pre-tax return on

average assets of 3.6% (FY2016: 4%) and pre-tax return on average equity of 17.9% (FY2016: 17.3%). We note

that the Bank’s smaller equity base as at FYE2017 contributed to a higher pre-tax ROE. Subsequent to year

end, annualised pre-tax ROA and ROE stood at 5% and 25.7% respectively for the five months period ended

31 May 2018.

We consider FBNQuest MB’s profitability to be good. Going forward, we believe that FBNQuest MB’s profit

margin will be strained by rising OPEX associated with its growth strategy and technology investments.

However, with a good risk management oversight, this growth should translate to a better bottom line.

CAPITAL ADEQUACY

As at 31 December 2017, FBNQuest MB’s Tier I capital (core capital) stood at ₦26.3 billion, well above the ₦15

billion regulatory requirement for merchant banks operating in Nigeria. However, year on year, the Bank’s core

capital weakened by 9.05% on account of higher dividends paid out during the review period which reduced

retained earnings. Ideally, FBNQuest MB’s dividend pay-out policy allows 80% of post-tax profits to be paid to

shareholders after all capital requirements have been considered. However, in 2017, the Bank paid out 213%

of its PAT as dividends, significantly higher than 21.4% recorded in the prior year. Subsequently, FBNQuest

MB’s capital adequacy ratio (CAR) declined to 15.73% from 22.59% prior year and was almost at par with the

Bank’s internal CAR minimum of 15%. Nonetheless, the Bank’s CAR was comfortably above the regulatory

threshold of 10% for merchant banks. Compared to its peers, FSDH MB (29.56%) and Coronation (24.8%),

FBNQuest MB’s CAR is low. Subsequent to year end, the Bank’s CAR further declined to 15.58% as at Q1, 2018,

reflecting the impact of the new IFRS 9 accounting standards on capitalisation, which we consider minimal.

In our opinion, FBNQuest MB’s capitalisation is good for its current business risks. The Bank is looking to issue

a bond in the near term premised on market conditions.

36.2%34.1% 34.9%

56.5%

51.5%53.7%

FBNQuest Coronation FSDH

Net Interest Spread Cost to Income Ratio

3.6% 3.7%2.7%

17.9% 18.4%

14.1%

FBNQuest Coronation FSDH

Pre-tax ROAA Pre-tax ROAE

16


2018 Credit Rating

LIQUIDITY AND LIABILITY GENERATION

FBNQuest MB’s liability generation has been supported by the strong FBN brand as well as sustained

relationships with customers from the erstwhile Kakawa Discount House. In addition, FBNQuest continues to

adopt various strategies to grow its deposit base by offering a wide range of products to cater for varying

clientele needs. The recent acquisition of FBNQuest Asset Management and ongoing digitalisation investments

are expected to grow the Bank’s deposits liabilities in the near term. Nonetheless, we recognise that regulatory

restrictions to wholesale deposits with a minimum of ₦50 million per tranche continues to place merchant

banks at a disadvantage for low cost deposits compared to commercial banks.

A breakdown of the Bank’s deposits by source shows a significant contribution (46%) from high net worth

individuals (HNIs) which attests to sustained relationships from its operations as Kakawa Discount House.

Other major depositors were finance companies (which include Pension Fund Administrators) and other

companies (largely corporates). As at FYE2017, FBNQuest MB’s top 20 depositors accounted for 37.2% of total

customer deposits as at FYE2017, higher than the prior year’s 12.7%. This reveals some level of concentration,

although we note positively a lower concentration compared to its peers (FSDH MB: 41.8%; Coronation MB:

73.1%), reflecting the dominance of HNIs in its deposits base.

Figure 9: Customer Deposits by Source (FYE2017)

FBNQuest MB’s customer deposits (excluding interbank takings) stood at ₦87.5 billion as at 31 December 2017

and represented a 35.2% growth year on year, despite intense competition from high yielding government

securities. Although this growth came at a cost to the Bank, we consider this positively as it shows some degree

of brand loyalty. Approximately 94.1% of customer deposits were in local currency (LCY) while the balance

were foreign currency (domiciliary accounts). LCY deposits which grew by 34% year on year were

predominantly in rate sensitive time deposits. Although FCY deposits increased by 56.5% in naira terms; when

we factor in the 7.85% naira devaluation during the period, growth was moderated at 44.2% year on year to

Banks

6%

Primary

Mortgage Banks

1%

Insurance

Companies

2%

Finance

Companies

22%

Other

Companies

23%

Individuals

46%

17


2018 Credit Rating

$15.6 million. Interbank takings stood at ₦11.6 billion as at year end and was lower than ₦38.9 billion in 2016.

However, interest expense paid to banks almost doubled, reflecting increased interbank takings and high

interbank rates during the year. The Bank’s deposit growth and mix resulted in a weighted average cost of

funds (WACF) of 12.48%, markedly higher than 9.45% in 2016 as well as its peer, FSDH MB at 11.56%. However,

Coronation’s WACF was higher at 15%.

Although interest rates declined slightly in the first half of 2018, we anticipate an increase in rates in the

second half of 2018 driven by government budget spending and pre electioneering activities. However, we do

not expect this to increase the Bank’s WACF significantly except the Bank obtains FCY borrowings as planned.

Figure 10: Weighted Average Cost of Funds- FBNQuest vs Peers (FY2017)

FBNQuest MB had no borrowings as at FYE2017. However, the Bank is in discussions with a number of

multilateral financial institutions for foreign currency funding. In addition, FBNQuest MB is set to issue a

medium term bond in H2, 2018 premised on favourable interest rates. We believe that these funds will support

the Bank’s growth strategy and resolve mismatches in its asset & liability profiles. As at 31 December 2017,

FBNQuest MB’s FCY loans accounted for 13.52% (~₦5.4 billion) of the loan book. These FCY loans which had

maturities of less than one year were partly funded by customer FCY deposits (0.9 times) as at FYE2017. In our

opinion, FBNQuest requires a more stable FCY funding base to manage its FCY exposures.

As at 31 December 2017, FBNQuest MB’s liquid assets stood at ₦60 billion and accounted for 61% of total

local currency deposits, lower than 63.1% in 2016. The Bank’s liquidity ratio stood well above the regulatory

minimum of 20% for merchant banks operating in Nigeria.

The maturity profiles of FBNQuest MB’s deposit liabilities and loans showed mismatches in the ‘180-360’ days

and ‘over 360 days’ buckets as at 31 December 2017, exposing the Bank to interest rate (re pricing) risks. To

manage this risk, FBNQuest MB has an Asset & Liability Management team within its Treasury department.

The interbank market provides access to short term funding as stop gaps in the event of any liquidity squeeze.

In addition, the Bank’s refinancing capacity remains good, backed by its affiliation with FBN Holdings.

11.6%

12.5%

15.0%

FSDH FBNQuest Coronation

18


2018 Credit Rating

Figure 11: Gap Analysis using Deposits and Loans Maturity Profiles

OWNERSHIP, MANAGEMENT & STAFF

FBNQuest Merchant Bank Limited is a wholly owned subsidiary of FBN Holdings Plc which is listed on the

Nigerian Stock Exchange (NSE) with over 1.2 million investors as at 31 December 2017.

FBNQuest MB is governed by an eight member board of directors which is chaired by Mallam Bello Maccido.

The Board comprises two Executive Directors and six Non-Executive Directors (two of whom are Independent

Directors). During the 2017 financial year, Mr. Akin Osinbajo was appointed Non-Executive Director effective

31 January, 2017 while Mr. Andrew Reicher (a Non-Executive Director) resigned effective 26 April 2017.

Mr. Akin Osinbajo is a Senior Advocate of Nigeria (SAN), an experienced litigator and commercial law

practitioner, chartered arbitrator and member of the Notary Public of Nigeria who has represented several

multinationals and local clients in commercial litigations in several courts in Nigeria. He is a joint Managing

Partner in Abdulai, Taiwo & Co. Solicitors, a firm known for its expertise in transactional matters relating to

Nigeria.

The management team of FBNQuest MB is headed by Mr. Kayode Akinkugbe who is the Managing

Director/Chief Executive Officer. He is supported by Mr Taiwo Okeowo, the Deputy Managing Director, and

seven senior management staff.

Following the acquisition of FBNQuest Asset Management and FBNQuest Securities, the Bank’s staff strength

increased by 33.1% to average 173 persons during the review year. Management staff accounted for 5% of

staff employed while non-management staff made up the balance of 95%. The Bank’s staff cost increased by

127.3% year on year and translated to a 70.8% growth in staff cost per employee to ₦16 million (FSDH MB:

₦17 million, Coronation MB: ₦12.1 million). However, staff productivity which is measured by net earnings per

65.5

-0.6

-5.3

-10 0 10 20 30 40 50 60 70

30-90 days

180-360 days

Over 360 days

In billions of Naira

Mat

uri

ty B

uck

ets

19


2018 Credit Rating

staff increased by a moderate 5.7% to ₦65.7 million and compared favourably with FSDH MB’s ₦63.2 million,

but less favourably with Coronation’s ₦119.6 million. Net earnings per staff sufficiently covered staff cost per

employee 4.1 times, lower than 6.7 times in 2016 and the Industry’s average of 4.6 times in 2017.

In our opinion, FBNQuest MB has an experienced and stable management team. We consider staff productivity

to be satisfactory.

MARKET SHARE The merchant banking segment accounted for about 1.8% of the banking industry’s total assets & contingents

as at 31 December 2017. Though a small faction, the segment is growing through the expansion of existing

operators and the emergence of new players. Although FBNQuest MB is the fourth largest out of the five

merchant banks operating in Nigeria in terms of total assets & contingents, the Bank continues to hold the

largest market share of the merchant banking deposits.

Table 3: Market Share Indicators (FBNQuest MB versus Peers)

FBNQuest MB 2017 FSDH Merchant 2017 Coronation MB 2017

Market

Share of

Industry

Merchant

Banking

Ranking

Market

Share of

Industry

Merchant

Banking

Ranking

Market

Share of

Industry

Merchant

Banking

Ranking

Total Assets & Contingents 0.37% 4th 0.41% 3rd 0.44% 2nd

LCY Deposits (less interbank) 0.49% 1st 0.27% 4th 0.43% 2nd

Total Loans & Leases (net) 0.26% 2nd 0.25% 3rd 0.21% 4th

Net Earnings 0.47% 2nd 0.34% 4th 0.42% 3rd

Profit before Tax 0.58% 2nd 0.45% 4th 0.57% 3rd

According to Agusto & Co’s estimates for the banking industry in 2017, FBNQuest MB’s share of total assets &

contingents declined to 0.37% from 0.43% in 2016. However, FBNQuest MB’s share of the Industry’s LCY

deposits (excluding interbank takings) stood at 0.49% as at FYE2017, up from 0.42% in 2016. The Bank also

held 0.26% of the banking industry’s net loans in 2017 (FYE2016: 0.31%).

We consider FBNQuest MB’s market share across key indicators to be good for its merchant banking business.

Expected growth in its funding base and loan portfolio subsequently should support the Bank’s overall market

share in the near term and further strengthen its footing in the merchant banking space.

20


2018 Credit Rating

OUTLOOK FBNQuest Merchant Bank Limited continues to thrive on the back of the FBN brand and synergies with

members of the FBNQuest Group, two of which were acquired by the Bank in 2017. This development is

expected to strengthen the Bank’s performance in the near term through wider product offerings, increased

lending and investment banking opportunities. FBNQuest MB’s good deposit base has supported its operations

to its current level. However, to achieve the much anticipated growth in 2018, the Bank will require additional

funding, hence the decision to issue a bond in the near term. The proposed Series 1 ₦10 billion bond to be

issued in H2, 2018 will support the Bank’s projected loan book growth to ₦60 billion by FYE2018, while

protecting net interest spread, provided rates are favorable. This should also create a more stable funding base

and correct mismatches in the Bank’s assets & liability profiles. Nonetheless, a good risk management

framework is imperative to forestall losses that may arise from expansion.

We note the impact of loan growth and the recently introduced IFRS 9 accounting standards on FBNQuest

Merchant Bank’s capitalisation ratios which was adversely impacted by the high dividend pay-out ratio in 2017.

Although the Bank’s CAR remains within its internal guidance limit of 15% and well above the regulatory

minimum of 10% for merchant banks operating in Nigeria, we believe that cautious and calculated growth is

vital.

In the last two years, FBNQuest MB has invested in infrastructure in preparation for the second phase of its

digitalisation process which will involve building applications to increase transaction volumes and grow the

Bank’s deposit base. This strategy is targeted at the retail market through the asset management subsidiary of

the Bank.

Going forward, we expect FBNQuest MB’s asset quality to remain acceptable, supported by a good risk

management framework. Though the Bank’s cost profile will remain elevated in the near term given

investments in technology, we believe that this will be moderated in the short term by cost containment

activities. We expect these investments to improve the Bank’s efficiency in the medium to long term.

We hereby attach a ‘stable’ outlook to the rating of FBNQuest Merchant Bank Limited.

21


2018 Credit Rating

FINANCIAL SUMMARY

FBNQUEST MERCHANT BANK LIMITEDBALANCE SHEET AS AT 31-Dec-2017 31-Dec-2016 31-Dec-2015

₦'000 ₦'000 ₦'000

ASSETS

1 Cash & equivalents 1,908 0.0% 1,908 0.0%

2 Government securities 53,961,271 38.9% 72,623,858 52.7% 40,568,622 38.1%

3 AMCON Securities 6,000,479 4.3% 4,278,170 3.1%

4 Quoted investments

5 Placements with discount houses

6 LIQUID ASSETS 59,963,658 43.2% 76,903,936 55.9% 40,568,622 38.1%

7 BALANCES WITH NIGERIAN BANKS 1,925,509 1.4% 696,372 0.5% 7,962,268 7.5%

8 BALANCES WITH BANKS OUTSIDE NIGERIA 6,993,120 5.0% 740,005 0.5%

9 Direct loans and advances - Gross 39,585,410 28.5% 42,204,312 30.7% 37,427,643 35.2%

10 Less: Cumulative loan loss provision (432,177) -0.3% (520,210) -0.4% (777,890) -0.7%

11 Direct loans & advances - net 39,153,233 28.2% 41,684,102 30.3% 36,649,753 34.4%

12 Advances under finance leases - net

13 TOTAL LOANS & LEASES - NET 39,153,233 28.2% 41,684,102 30.3% 36,649,753 34.4%

14 INTEREST RECEIVABLE

15 OTHER ASSETS 3,993,045 2.9% 4,644,967 3.4% 865,861 0.8%

16 DEFERRED LOSSES 9,113,547 6.6% 8,801,880 6.4% 7,994,494 7.5%

17 RESTRICTED FUNDS 2,172,798 1.6% 277,266 0.3%

18 UNCONSOLIDATED SUBSIDIARIES & ASSOCIATES 1,737,106 1.3%

19 OTHER LONG-TERM INVESTMENTS 9,005,703 6.5% 2,176,604 1.6% 11,169,336 10.5%

20 FIXED ASSETS & INTANGIBLES 4,631,534 3.3% 2,028,777 1.5% 983,776 0.9%

21 TOTAL ASSETS 138,689,253 100.0% 137,676,643 100.0% 106,471,376 100.0%

22 TOTAL CONTINGENT ASSETS

23 TOTAL ASSETS & CONTINGENTS 138,689,253 100% 137,676,643 100% 106,471,376 100%

CAPITAL & LIABILITIES

24 TIER 1 CAPITAL (CORE CAPITAL) 26,339,624 19.0% 28,959,057 21.0% 27,843,535 26.2%

25 TIER 2 CAPITAL

26 LONG-TERM FOREIGN BORROWINGS

27 Demand deposits 84,094 0.1% 486,439 0.5%

28 Savings deposits

29 Time deposits 82,321,467 59.4% 61,340,305 44.6% 67,112,679 63.0%

30 Inter-bank takings 11,639,548 8.4% 38,863,965 28.2% 5,600,186 5.3%

31 TOTAL DEPOSIT LIABILITIES - LCY 93,961,015 67.7% 100,288,364 72.8% 73,199,304 68.8%

32 Customers' foreign currency balances 5,169,517 3.7% 3,303,260 2.4% 4,032,260 3.8%

33 TOTAL DEPOSIT LIABILITIES 99,130,532 71.5% 103,591,624 75.2% 77,231,564 72.5%

34 INTEREST PAYABLE

35 OTHER LIABILITIES 13,219,097 9.5% 5,125,962 3.7% 1,396,277 1.3%

36 TOTAL CAPITAL & LIABILITIES 138,689,253 100.0% 137,676,643 100.0% 106,471,376 100.0%

37 TOTAL CONTINGENT LIABILITIES

38 TOTAL CAPITAL, LIABILITIES & CONTINGENTS 138,689,253 100% 137,676,643 100% 106,471,376 100%

Proof

BREAKDOWN OF CONTINGENTS

39 Acceptances & direct credit substitutes

40 Guarantees, bonds etc..

41 Short-term self liquidating contingencies

22


2018 Credit Rating

FBNQUEST MERCHANT BANK LIMITED

INCOME STATEMENT FOR THE YEAR ENDED 31-Dec-2017 31-Dec-2016 31-Dec-2015

₦'000 ₦'000 ₦'000

42 Interest income 18,994,331 79.3% 12,839,870 79.5% 15,092,465 92.2%

43 Interest expense (12,119,198) -50.6% (8,199,829) -50.8% (9,820,038) -60.0%

44 Loan loss expense (471,429) -2.0% 131,962 0.8% (465,641) -2.8%

45 NET REVENUE FROM FUNDS 6,403,704 26.7% 4,772,003 29.5% 4,806,786 29.4%

46 ALL OTHER INCOME 4,970,707 20.7% 3,311,206 20.5% 1,282,040 7.8%

47 NET EARNINGS 11,374,411 47.5% 8,083,209 50.0% 6,088,826 37.2%

48 Staff costs (2,763,435) -11.5% (1,215,888) -7.5% (1,237,972) -7.6%

49 Depreciation expense (728,022) -3.0% (140,895) -0.9% (133,651) -0.8%

50 Other operating expenses (2,934,890) -12.2% (1,810,516) -11.2% (890,893) -5.4%

51 TOTAL OPERATING EXPENSES (6,426,347) -26.8% (3,167,299) -19.6% (2,262,516) -13.8%

52 PROFIT (LOSS) BEFORE TAXATION 4,948,064 20.6% 4,915,910 30.4% 3,826,310 23.4%

53 TAX (EXPENSE) BENEFIT (863,601) -3.6% (16,083) -0.1% 2,739,201 16.7%

54 PROFIT (LOSS) AFTER TAXATION 4,084,463 17.0% 4,899,827 30.3% 6,565,511 40.1%

55 NON-OPERATING INCOME (EXPENSE) - NET

56 DIVIDEND (8,700,000) -36.3% (1,048,000) -6.5%

57 GROSS EARNINGS 23,965,038 100% 16,151,076 100% 16,374,505 100%

58 AUDITORS PWC PWC PWC

59 OPINION CLEAN CLEAN CLEAN

KEY RATIOS 31-Dec-2017 31-Dec-2016 31-Dec-2015

EARNINGS

60 Net interest margin 36.2% 36.1% 34.9%

61 Loan loss expense/Interest income 2.5% 3.1%

62 Return on average assets (Pre - tax) 3.6% 4.0% 3.8%

63 Return on average equity (Pre - tax) 17.9% 17.3% 17.0%

64 Operating Expenses/Net earnings 56.5% 39.2% 37.2%

65 Gross earnings/Total assets & contingents 17.3% 13.2% 16.4%

EARNINGS MIX

66 Net revenue from funds 56.3% 59.0% 78.9%

67 All other income 43.7% 41.0% 21.1%

LIQUIDITY

68 Total loans & leases - net/Total lcy deposits 30.0% 16.9% 28.6%

69 Liquid assets/Total lcy deposits 61.0% 63.1% 63.5%

70 Demand deposits/Total lcy deposits 0.1% 0.7%

71 Savings deposits/Total lcy deposits

72 Time deposits/Total lcy deposits 87.6% 61.2% 91.7%

73 Inter-bank borrowings/Total lcy deposits 12.4% 38.8% 7.7%

74 Interest expense - banks/Interest expense 22.0% 9.9% 72.5%

75 NET FOREIGN CURRENCY ASSETS (LIABILITIES) 1,823,603 (2,563,255) (4,032,260)

23


2018 Credit Rating

FBNQUEST MERCHANT BANK LIMITED

KEY RATIOS CONT'D 31-Dec-2017 31-Dec-2016 31-Dec-2015

ASSET QUALITY

76 Performing loans (₦'000) 38,322,445 40,764,509 32,844,762

77 Non-performing loans (₦'000) 1,262,965 1,439,803 4,582,881

78 Non-performing loans/Total loans - Gross 3.19% 3.41% 12.24%

79 Loan loss provision/Total loans - Gross 1.1% 1.2% 2.1%

80 Loan loss provision/Non-performing loans 34.2% 36.1%

81 Risk-weighted assets/Total assets & contingents 34.8% 35.0% 43.6%

CAPITAL ADEQUACY

82 Adjusted capital/risk weighted assets 26.2% 39.8% 42.7%

83 Tier 1 capital/Adjusted capital 114% 100% 100%

84 Total loans - net/Adjusted capital 2.72 3.05 3.05

85 Capital unimpaired by losses (₦'000) 17,226,077 20,157,177 19,849,041

CAPITAL ADEQUACY STRESS TEST

86 Adjusted capital (₦'000) 12,648,055 19,184,592 19,829,161

87 Cumulative loan loss provision (actual reserves) 432,177 520,210 777,890

88 Equity before all provision (line 86 + line 87) 13,080,232 19,704,802 20,607,051

89 Required reserves* 5,529,210 5,749,922 8,157,115

90 Equity after required reserves (line 88 - line 89) 7,551,022 13,954,880 12,449,936

91 Equity after required reserves/risk weighted assets 15.6% 28.9% 26.8%

STAFF INFORMATION

92 Net earnings per staff (₦'000) 65,748 62,179 86,983

93 Staff cost per employee (₦'000) 15,974 9,353 17,685

94 Staff costs/Operating expenses 43.0% 38.4% 54.7%

95 Average number of employees 173 130 70

96 Average staff per office 58 43 23

OTHER KEY INFORMATION

97 Legal lending limit(₦'000) 8,613,039 10,078,589 9,924,521

98 Other unamortised losses(₦'000) NONE NONE NONE

99 Unreconciled inter-branch items (₦'000) DR/(CR) NONE NONE NONE

100 Number of offices 3 3 3

101 Age** (in years) 22 21 20

102 Government stake in equity (Indirect) Nil Nil Nil

MARKET SHARE OF INDUSTRY TOTAL Actual Actual Actual

103 Lcy deposits (excluding interbank takings) 0.5% 0.4% 0.5%

104 Total assets & contingents 0.4% 0.4% 0.3%

105 Total loans & leases - net 0.3% 0.3% 0.3%

106 Non interest income 0.5% 0.4% 0.2%

107 Net interest income 0.4% 0.3% 0.4%

24


2018 Credit Rating

RATING DEFINITIONS

Rating Category Modifiers

A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category. Therefore, a

rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the - (minus)

sign.

Aaa A financial institution of impeccable financial condition and overwhelming capacity to meet obligations as and

when they fall due. Adverse changes in the environment (macro-economic, political and regulatory) are unlikely

to lead to deterioration in financial condition or an impairment of the ability to meet its obligations as and when

they fall due. In our opinion, regulatory and/or shareholder support will be obtained, if required.

Aa A financial institution of very good financial condition and strong capacity to meet its obligations as and when

they fall due. Adverse changes in the environment (macro-economic, political and regulatory) will result in a

slight increase the risk attributable to an exposure to this financial institution. However, financial condition and

ability to meet obligations as and when they fall due should remain strong. Although regulatory support is not

assured, shareholder support will be obtained, if required.

A A financial institution of good financial condition and strong capacity to meet its obligations. Adverse changes

in the environment (macro-economic, political and regulatory) will result in a medium increase in the risk

attributable to an exposure to this financial institution. However, financial condition and ability to meet

obligations as and when they fall due should remain largely unchanged. In our opinion, shareholder support

should be obtainable, if required.

Bbb A financial institution of satisfactory financial condition and adequate capacity to meet its obligations as and

when they fall due. It may have one major weakness which, if addressed, should not impair its ability to meet

obligations as and when due. Adverse changes in the environment (macro-economic, political and regulatory)

will result in a medium increase in the risk attributable to an exposure to this financial institution.

Bb Financial condition is satisfactory and ability to meet obligations as and when they fall due exists. May have

one or more major weaknesses. Adverse changes in the environment (macro-economic, political and regulatory)

will increase risk significantly.

B Financial condition is weak but obligations are still being met as and when they fall due. Has more than one

major weakness and may require external support, which, in our opinion, is not assured. Adverse changes in the

environment (macro-economic, political and regulatory) will increase risk significantly.

C Financial condition is very weak. Net worth is likely to be negative and obligations may already be in default.

D In default.

www.agusto.com

© Agusto&Co.

UBA House (5th Floor)

57 Marina Lagos

Nigeria.

P.O Box 56136 Ikoyi

+234 (1) 2707222-4

+234 (1) 2713808

Fax: 234 (1) 2643576

Email: [email protected]

Documents

Final Rating Report - FMDQ Group · During the 2017 financial year , FBNQuest Merchant B ank maintained local banking relationships with First Bank of Nigeria Limited, Guaranty Trust