Johannesburg, 23 July 2020 – GCR Ratings (“GCR”) has upgraded Fidelity Bank Ghana Limited’s national scale long term and short term ratings to A(GH) and A1(GH) from A-(GH) and A2(GH) respectively, with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|Fidelity Bank Ghana Limited||Long Term issuer||National||A(GH)||Stable Outlook|
|Short Term issuer||National||A1(GH)|
The analysis on Accra based- Fidelity Bank Ghana Limited (“FBL Ghana”) reflects the strengths and weaknesses of the wider Fidelity Limited Group. The upgrade factors in improvement in asset quality relative to domestic peers and sustained good liquidity. The ratings also reflect the bank’s sound domestic business profile supported by the bank’s above average distribution network, good spread of local geographic diversification, adequate capitalisation and stable funding structure.
The business profile is a ratings positive, supported by the bank’s position as one of the top 5 banks in Ghana. At 31 December 2019, market share of industry deposits was 7.3% (FY18: 7.6%) and advances 4.4% (FY18: 4.2%). Furthermore, the bank has a good local presence supported by a large local distribution network. However, the group’s cost of funds are structurally higher than some other Ghanaian top tier banks. We expect cost of funds to be sustained in the range of 3% to 3.5% against a top tier range of 1.5% to 2% over the next 12-24 months. Business line and geographic diversification is in line with industry averages.
The group is considered to be adequately capitalised. We forecast a GCR capital ratio of between 23% and 25% over the next 12 to 18 months, balancing our expectations of 1) good internal capital generation of between 25% and 30%, outpacing risk weighted asset growth over the rating horizon; 2) an increase in credit losses to c.5% in 12 months moderating to c.3% over the next 24 months; and 3) approximately 65% to 70% interest income from government debt securities. Earnings quality is a moderate ratings negative reflected by revenue stability risk characterised by high source concentration and a material exposure to market sensitive income (69%). Yields from government currency bonds/ securities account for the bulk of market income, classified as such because the activities are supported by cross currency swaps and short to medium term debt from financial institutions. The ratings may improve should the bank diversify revenue sources to levels below 40% maintaining internal capital generation of over 23%. Loan loss reserve coverage of stage 3 loans including haircut collateral is currently considered adequate but could be exposed to asset revaluation pressures.
The risk position is sound, balancing the probability of asset quality deterioration due to the COVID-19 related economic shock and modest oil prices, and the better than market gross non-performing loans (NPLs). The bank recorded a regulatory NPLs ratio of 2.1% at 31 March 2020 (FY19: 1.8%) against the industry average 14.5% and rated peers. Initial assessments of the potential impact of the COVID-19 pandemic indicate that the bank will not be immune to the sector-wide challenges which include credit extension and slower loan repayments. Foreign exchange (FX) risk is considered minimal. The FX lending book was c.38% at 31 March 2020 and is adequately hedged by swaps.
Funding and liquidity is a ratings positive reflecting high liquid asset coverage of the funding base. The funding structure is fairly stable and broadly comparable to some top tier banks in Ghana, with retail deposits accounting for c.60% of the customer deposits. The GCR long term funding ratio and stable funding ratios were 65.4% and 84.8% respectively at 31 March 2020. Liquidity is very good. FX liquid asset coverage improved to 62% at 31 December 2019 from a 3 year average of 10%. At 31 March 2020, GCR liquid asset coverage of wholesale funding and customer deposits was 2x and 137% respectively.
The outlook is stable balancing the strain of the operating environment on the financial profile and our expectations that FBL Ghana will relatively outperform the market in terms of earnings and liquidity over the next two years. Furthermore, we expect the capitalisation to range between 23% and 25%, supported by internal capital generation outpacing risk weighted asset growth, and rising cost of risk. We expect credit losses to increase to around 5% in 2020 and improve to 3% in 2021, as the operating volatility subsides without a material adverse impact on loan book exposures. We anticipate for liquidity to remain a ratings positive. The business profile is not expected to change materially over the outlook horizon.
We could lower the ratings if: 1) credit losses are sustained at levels above 5% in the outlook horizon; 2) asset quality deteriorates in line with or below industry averages; or 3) the company records internal capital generation at levels lower or in line with risk weighted asset growth. Upward ratings potential is unlikely over the rating horizon. However, we could raise the ratings if FBL Ghana raises and maintains a higher GCR capital ratio (above 23%) over the outlook horizon, alongside a sustained reduction in market sensitive income to below 40% of operating revenues.
|Primary analyst||Vimbai Muhwati||Financial Institutions Analyst|
|Johannesburg, ZA||VimbaiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Financial Institutions Sector Risk Score, July 2020|
Fidelity Bank Ghana Limited
Risk score summary
|Rating Components & Factors||Risk Scores|
|Country risk score||3.50|
|Sector risk score||2.50|
|Management and governance||0.00|
|Capital and Leverage||(0.25)|
|Funding and Liquidity||1.00|
|Balance Sheet||Also known as 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.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Fidelity Bank Ghana Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Fidelity Bank Ghana Limited participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from Fidelity Bank Ghana Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2019
- Four years of comparative audited numbers
- Unaudited financial results as at 31 March 2020
- Breakdown of facilities
- Banking sector information and Industry comparative data
- Other related documents.