Johannesburg, 31 July 2017 – Global Credit Ratings (“GCR”) 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 2018.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Fidelity Bank Ghana Limited’s (“Fidelity”, “the bank”) based on the following key criteria:
The accorded ratings reflect Fidelity’s established domestic market position, adequate capitalisation and comfortable liquidity. Offsetting these key rating drivers is rising asset quality stress attributed to a challenging macroeconomic environment, as well as non-performing exposures to Bulk Oil Distribution Companies (“BDCs”), which have negatively impacted the domestic banking industry’s (including Fidelity) loan quality and earnings growth. GCR takes note of ongoing efforts by the Government of Ghana to restructure and repay legacy debt in the oil sector to safeguard financial stability.
The bank reported a total risk weighted capital adequacy ratio (“CAR”) of 26.5% (FY15: 29.5%) and Tier 1 CAR of 17.7% (FY15: 19.6%) at FY16, which were well above the Basel 1 regulatory minima of 10% and 8% respectively.
Delayed resolution of the BDCs’ debt to the domestic banking industry contributed to significant loan quality deterioration in FY16. Accordingly, Fidelity’s asset quality indicators weakened in FY16, with the gross non-performing loan (“NPL”) ratio escalating to 11.7% (FY15: 5.8%). The bank’s BDC exposure represented 49.4% of its NPLs at FY16. The BDC exposure amounted to GHC290.8m (USD69.2m) at FY16 with USD27.3m classified as substandard and the balance as special mention. Accordingly, special mention loans/early (<90 days) arrears were a high 40.8% of total gross loans at FY16 (FY15: 13.5%). Positively, the government has agreed to a payment plan and has paid 30% of the BDC debt with banks via bond issues. Fidelity prudently made provisions to cover 40% of the BDC exposure at FY16. The first bond (five year) for USD200m was issued in January 2017, which settled USD30m of the bank’s debt (with USD20.9m received so far). The process by which the government will pay the remaining debt is on course, and expected to conclude by end-2017. Notwithstanding ongoing initiatives, the bank is prudently increasing monthly provisions to cater for the remaining troubled BDC exposure with full coverage by end 2017. The bank’s gross NPL ratio increased slightly to 11.9% at 1H FY17 (5.9% excluding the BDC exposure). Comparatively, the domestic banking industry’s average gross NPL ratio rose to 17.3% at FY16 (FY15: 14.7%). The bank’s specific provisions covered 95.8% of NPLs at 1H FY17 (FY16: 75.7%), pre-collateral. Unreserved NPLs were equivalent to 1.1% of regulatory capital at 1H FY17 (FY16: 7.8%). Gross loan growth contracted further by 4.5% in FY16 (FY15: 4.5% decrease), due to the focus on bad debt recovery, resolution of the BDC exposure and generally higher risk aversion given weak economic conditions. Gross loans grew by a marginal 1.0% for the six months to June 2017.
Pre-tax profit was down 93.4% to GHC13.4m at FY16 (FY15: 79.1% increase) attributable to the escalation (215.8%) in credit costs, a 72.3% decline in foreign exchange trading income (as a result of reduced transaction volumes, particularly oil related trade finance transactions) and a smaller loan book. The sharp decline in earnings saw a decrease in the ROaE and ROaA to 2.2% (FY15: 41.7%) and 0.2% (FY15: 4.0%) respectively in FY16.
Direct funding and liquidity risks are partly mitigated by a liquid balance sheet, with liquid assets (excluding mandatory statutory reserves with the central bank) constituting 52.5% of total assets at FY16 (FY15: 56.0%). Liquid assets (excluding statutory reserves) amounted to 69.3% of total funding at FY16 (FY15: 65.9%).
A sustained improvement in asset quality metrics (including substantial progress in NPL workouts), steady operating (capital, liquidity and earnings) metrics through the economic cycle, as well as sustained growth in market share, would help strengthen Fidelity’s financial profile, and stabilise ratings at current levels. Key rating triggers for a downgrade include a sustained weakening in profitability stemming from a sharp rise in loan loss provisions and delayed resolution of outstanding non-performing BDC exposures, a marked decline in liquidity or capitalisation and a higher susceptibility to regulatory and economic changes.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2015)||Last rating (July 2016)|
|Long-term: A-(GH); Short-term: A1-(GH)||Long-term: A-(GH); Short-term: A1-(GH)|
|Outlook: Stable||Outlook: Stable|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Fidelity rating reports (2015-16)
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, teleconferences 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 with no contestation of the ratings.
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 2016 (plus four years of comparative numbers);
- Unaudited management accounts of the bank as at 30 June 2017;
- Budgeted financial statements for 2017;
- Corporate governance and enterprise risk framework;
- Reserving methodologies and capital management policy;
- 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
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|Bad Debt||An amount owed by a debtor that is unlikely to be paid due, for example, to a company going into liquidation. There are various technical definitions of what constitutes a bad debt, depending on accounting conventions, regulatory treatment and the individual entity’s own provisioning and write-off policies.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|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||Not current; ordinarily more than one year.|
|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.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Short-Term||Current; ordinarily less than one year.|
|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.|
For a glossary of terms please click here
GCR affirms Fidelity Bank Ghana Limited’s rating of A-(GH); Outlook Negative.