Johannesburg, 29 July 2016 — Global Credit Ratings has affirmed the national scale ratings assigned to Fidelity Bank Ghana Limited of A-(GH) and A1-(GH) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until July 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Fidelity Bank Ghana Limited (“Fidelity”, “the bank”) based on the following key criteria:
The ratings of Fidelity reflect its established domestic market position, adequate capitalisation, comfortable liquidity and resilient earnings performance in a difficult operating environment. Notwithstanding this, the bank remains under significant pressure from ongoing domestic macroeconomic challenges (including the energy crisis and weak economic activity), that have put pressure on asset quality in all banks including Fidelity.
Fidelity reported a total risk weighted capital adequacy ratio of 29.5% (FYE14: 24.5%) and Tier 1 risk based capital ratio of 19.6% (FYE14: 16.3%) at FYE15, which were above the regulatory minima of 10% and 8% respectively, calculated in line with Basel I.
Gross non-performing loans (“NPLs”) grew 1.2x in F15 (F14: 15.4% decrease), amid increasing macroeconomic pressures (including rising interest rate cycle, strong inflationary pressures, weak commodity prices and currency depreciation). Consequently, gross NPLs amounted to 5.8% of gross loans at FYE15 (FYE14: 2.4%), with the ratio partly exacerbated by limited loan issuance in F15 (gross loans shrank by 9.2%). The industry average gross NPL ratio was 14.7% at end-2015 (2014: 11.3%). Nevertheless, Fidelity’s special mention loans/early (<90 days) arrears increased to 13.5% of total loans at FYE15 (FYE14: 4.6%). Specific provisions (raised in line with prudential guidelines) covered 68.7% of NPLs at FYE15 (FYE14: 89.9%), pre-collateral. NPLs are fully covered after taking into account collateral. Although credit mitigation is supported by holding collateral, security realisation is considered a problematic and lengthy process due to cumbersome legal processes. Notwithstanding this, the ratio of NPLs net of provisions to regulatory capital remained low at 4.7% FYE15 (FYE14: 0.9%).
Pre-tax profit grew by 79.1% to GHC204.7m in F15 (F14: 82.2%), supported by strong growth in net interest income (a higher net interest margin and better asset yields) and growth in non-interest income. The cost ratio declined to 53.6% in F15 (F14: 56.9%), but remained above the industry average of 49.9%. The main cost drivers included integration costs (following the acquisition of ProCredit Savings and Loans Limited) and investments in IT and enhanced customer service delivery. Overall the ROaE decreased slightly to 41.7% in F15 (F14: 42.3%), while the ROaA increased to 4.0% (F14: 3.5%).
Direct funding and liquidity risks are partly ameliorated through maintaining a liquid balance sheet. Fidelity holds reserves in highly tradable instruments or money market placements, with liquid assets (excluding mandatory statutory reserve balances with the central bank) amounting to 51.3% of total assets at FYE15 (FYE14: 35.7%). A conservative loans and advances to deposit (including lines of credit/borrowings) ratio in F15 of 46.9% (F14: 69.2%) also helped to reduce liquidity risk. Liquid assets (excluding statutory reserves) amounted to 65.9% of total funding at FYE15 (FYE14: 46.5%).
Strong financial metrics in terms of profitability, asset quality and capitalisation, and a further strengthening of the bank’s competitive position in the domestic market, could lead to upward ratings migration. Upside potential would probably require notable improvements in the operating environment. GCR also takes note of the need to further reduce the cost of funding. Key rating triggers for a downgrade include a sustained weakening in profitability stemming from a sharp rise in loan loss provisions, inadequately controlled growth and a higher susceptibility to regulatory and economic changes, or from a marked decline in liquidity or capitalisation.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (July 2015)|
|Long-term: A-(GH); Short-term: A1-(GH)|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior 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, updated March 2016
Fidelity rating report (2015)
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 2015 (plus four years of comparative numbers);
- Unaudited management accounts of the bank as at 30 June 2016;
- Budgeted financial statements for 2016;
- 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 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.|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Basel I||Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.|
|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.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|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.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|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.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms utilised in this announcement please click here