Johannesburg, 31 October 2018 – Global Credit Ratings has affirmed Fidelity Bank Ghana Limited’s long-term and short-term national scale ratings of A-(GH) and A1-(GH) respectively; with the outlook accorded as Negative. The ratings are valid until July 2019.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Fidelity Bank Ghana Limited (“Fidelity”, “the bank”) based on the following key assumptions:
The ratings on Fidelity are supported by adequate levels of Tier 1 capitalisation, a material improvement in profitability and progressed recovery prospects of legacy debts. On the other hand, the outlook is negative reflecting the still weak levels of asset quality, alongside high loan concentrations and foreign currency lending, and the bank’s modest market position. We could lower the ratings on the bank if there is no material improvement in asset quality by end of 1st quarter of 2019, because in our opinion the level of non-performing loans (“NPLs”) including special mention loans is still too high and the general economic environment is improving. We could also lower the ratings if our expectations regarding the bank’s improved long-term profitability does not materialise. We do not expect to raise the ratings over the rating horizon.
Capitalisation is adequate, supported by material improvement in profitability and healthy retention of earnings. Tier 1 capital adequacy ratio registered 19.8% at 1H18, although we think it will moderate based on our expectation of credit losses increasing given significant loan growth. The bank is targeting to grow lending assets and we think that credit losses will increase as the effect of IFRS 9 takes on, coupled with the potential downside of banks not fully recovering from legacy debts.
Risk position is weak. Although asset quality has somewhat improved given the good recovery prospects of legacy debts, we still think it is weak outside the restructured loans. Loan loss reserve coverage of NPLs including restructured loans is adequate at 64.3% for FY17. We are however cautious of the high loan concentration, foreign currency lending, revenue concentration from treasury securities.
Funding is concentrated albeit largely due the public sector proceeds which we think are sticky. Liquidity is good because deployment of funds has largely been to treasury bills and other low risk cash funds, while growth in lending has been passive. However, we view liquidity risk to moderately increase over the rating horizon as allocation to lending assets increases. Notwithstanding this, the bank aims to fund its loan book with core retail deposits.
Market position is modest. Revenue stability is adequate barring significant concentration of income from treasury securities. We however view the bank’s lending franchise to be modest. Furthermore, a deposit market share of 6.6%, with retail deposits accounting for approximately 44% of total deposits limits the bank’s competitive position among top tier banks. We also think that the structure of funds comprising a good portion of wholesale deposits is a drag to the bank’s profitability in the long term.
We do not expect to raise the ratings over the outlook horizon. We could lower the ratings on the bank if there is not a material improvement in asset quality by end of 1st quarter of 2019. We could also lower the ratings if our expectations regarding the bank’s improved long-term profitability does not materialize.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2015)||Last rating (July 2017)|
|Long-term: A-(GH); Short-term: A1-(GH)||Long-term: A-(GH); Short-term: A1-(GH)|
|Outlook: Stable||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Simbarake Chimutanda||Matthew Pirnie|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Fidelity rating reports (2015-17)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Fidelity Bank Ghana Limited participated in the rating process via face-to-face management meetings, teleconference and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have has been disclosed to Fidelity Bank Ghana Limited.
The information received from Fidelity Bank Ghana Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of the bank at 31 December 2017 (plus four years of comparative numbers);
- Unaudited management accounts of the bank as at 30 June 2018;
- Budgeted financial statements for 2018;
- Corporate governance and enterprise risk framework;
- Industry comparative data and regulatory framework; and
- A breakdown of facilities available and related counterparties.
The ratings above were solicited by, or on behalf of, Fidelity Bank Ghana Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Core Deposits||That portion of a bank’s deposits that is relatively stable and has a predictable cost. Deposits fluctuate seasonally and cyclically, but even in adverse circumstances, deposits normally do not fall below some minimum level.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|International Financial Reporting Standards||IFRS is designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
|Tier 2 Capital||Secondary capital is mainly made up of subordinated debt, portfolio impairment and 50% of any revaluation reserves and other specified regulatory deductions.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a glossary of terms please click here
GCR affirms Fidelity Bank Ghana Limited’s rating of A-(GH); Outlook Negative.