FSDH Merchant Bank N15bn CP issuance: Here’s what Meristem view

FSDH Merchant Bank Limited Series 14, 15 & 16 Commercial Paper (CP) Issuance of up to N15billion under its N40billion Commercial Paper programme is open and scheduled to close on Thursday, April 20 2023.

The proceed of the issue will be used to fund the issuer’s short-term working capital requirements and general corporate purposes.

Sodiq Safiriyu, an analyst at Meristem Research said “We express concern about the company’s low cash position. To compensate for this risk, we consider an additional premium of 2 per cent sufficient”.

According to Meristem Research, “While we consider the premium on the instruments relative to comparable risk-free instruments attractive, we note that the company’s 14-Day, 91-Day, and 182-Day instruments presently listed on the FMDQ offer 15.96percent, 15.78percent, and 15.73percent, yields respectively as of April 18, 2023.”

The analyst noted that FSDH Merchant Bank Limited has three major income streams: interest income, fees and commission, and trading income.

“In 2022FY, the company’s gross earnings improved by 78.44 per cent year-on-year (YoY) to settle at N24.60 billion. This sharp growth was a result of a notable increase in the bank’s interest income, improving circa 3.00x to N18.69 billion in 2022FY (versus N6.86 billion in 2021FY).

“This highlights the bank’s operational effectiveness. Similarly, in Q1: 2023, the bank’s gross earnings grew by 78.01 per cent YoY with all income streams contributing positively to this growth,” Safiriyu.

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The company’s operating expenses increased (+23.65percent YoY) in 2022FY. However, the impact of this increase was mitigated by a significant operating income growth of circa 71 per cent, ultimately moderating the cost-to-income ratio (CIR) to 60.27 per cent (versus 83.43 per cent in 2021FY). This emphasises the bank’s strong cost efficiency during 2022FY. Consequently, Profit After Tax (PAT) surged by 312.36 per cent YoY in 2022FY to N3.66 billion.

“This elevated the bank’s net margin by 950 basis points (bps) to 16.80 per cent. Similarly, in Q1:2023, these profitability metrics continued their respective upward trends largely hinged on the bank’s impressive operating income.

“Consequently, the cost-to-income ratio and net margin were 46.54 per cent and 23.45 per cent, respectively. In addition, profit after tax settled at N1.94 billion. For the remainder of the year, we expect an uptrend in asset yield; hence, the gross earnings and PAT are expected to improve.

“In 2022FY, the Bank had a total balance sheet size of N251.86 billion, of which 21.20 per cent and 21.92 per cent were held as cash and investment securities, respectively. In addition, the most recent available data revealed that FSDH’s liquidity ratio stood at 74 per cent in 2021FY (higher than the regulatory benchmark of 20 per cent). Conversely, its net operating cash flow dipped significantly to a negative value of N27.15 billion in 2021FY (from a positive value of N18.44 billion in 2020FY). Nonetheless, we highlight that FSDH maintains a stable liquidity position and has adequate ability to service its short-term obligations when due.”