Lagos, 17 November 2021 – GCR Ratings (“GCR”) has upgraded Fidelity Bank Plc’s national scale long-term and short-term issuer credit ratings to A(NG) and A1(NG) from A-(NG) and A2(NG) respectively, with the Outlook revised to Stable from Negative.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|Fidelity Bank Plc||Long Term issuer||National||A(NG)||Stable Outlook|
|Short Term issuer||National||A1(NG)|
The ratings upgrade reflects Fidelity Bank Plc’s (“Fidelity” or “the bank”) strong growth trajectory over the review period (FY17-1H21), whilst maintaining moderate credit losses through the cycle and relatively low non-performing loans (“NPL”) ratio, as well as the bank’s stable funding structure.
Fidelity’s competitive position is underpinned by its positioning within the tier 2 segment of the Nigerian banking industry. With a balance sheet size of N3.1trillion as at 1H21, Fidelity controls 5.3%, 5.8%, and 7.4% of the industry total assets, customer deposits, and gross loans and advances respectively. The bank has demonstrated revenue stability over the review period, with net interest income maintaining an upward trajectory, notwithstanding the highly competitive lending space and decreasing yield on investment securities. However, the bank’s operations are limited to Nigeria, with a narrow focus on core banking activities. This limited product and geographic diversification are a constraint on the competitive position. Management and governance standards of the bank are in line with industry best practices.
Capital and leverage is a rating negative. The bank’s capital adequacy ratio (“CAR”) improved to 18.8% at 1H21 from 18.2% at FY20 (FY19: 18.3%), largely supported by tier 2 funding. While this is above the 15% regulatory minimum for its international banking license category, rapid risk-weighted assets (“RwA”) growth saw the tier 1 capital adequacy ratio decline from 15.5% at FY19 to 14.1% at 1H21. GCR computed capital ratio is forecast to register within the intermediate range, at c.16%, over the next 12-18 months.
Risk is a rating positive. Fidelity’s credit losses compare well to peers, averaging c.1.0% over the review period, albeit rising to 1.3% at FY20 from -0.5% at FY19, largely reflecting the impact of COVID-19 Pandemic on banks’ risk assets. The NPL ratio moderated to 2.8% at 1H21, after rising to 3.8% at FY20 from 3.3% recorded at FY19. This is well below the regulatory tolerable limit of 5% and the industry average NPL ratio of about 6% in FY20. In line with industry norms, the oil and gas sector had the highest credit allocation at 25.6% of gross loans and advances as at 1H21 (FY20: 22.6%; FY19: 20.8%). Obligor concentration is evident, with the top 20 obligors contributing 47.2% to gross loans and advances at FY20, while the two largest exposures were in breach of the regulatory single obligor limit of 20%. The bank’s foreign currency lending is also above the industry average of 35%, at c.40% of gross loans at FY20/19. We also factored in the sizable portion of the bank’s loan book (1H21: 26.8%) restructured in line with the CBN’s regulatory forbearance initiative in 2020, albeit balanced against management’s representation that the facilities are performing in line with agreed terms. Related party exposures are less than the 10% GCR benchmark, and we consider market and operational risks to be well controlled.
Funding and liquidity is a rating positive, reflecting the bank’s stable funding structure and liquid balance sheet. Core customer deposits accounted for the bulk of funding at 85.0% of the funding base at FY20 (FY19: 80.2%), albeit we noted the relatively modest contribution of retail deposits (FY20: 28.7%) and the sizable contribution of wholesale financial institution deposits. However, the deposit book is relatively diversified and supportive of funding cost for the bank. The top 20 depositors contributed 23.9% to total deposits, while the relatively inexpensive current and savings account (CASA) accounted for 77.4% of the deposit book as at FY20. GCR liquid assets coverage of wholesale funding and customer deposits stood at a healthy 3.2x and 42.7% respectively at FY20.
The Outlook is Stable, balancing GCR’s expectation that Fidelity’s NPL ratio and credit losses will be maintained well below the average for peers. We also expect retained earnings progression to continue apace, such that the bank’s capitalisation is not pressured further downwards, considering the expected high RwA growth over the next 12-18 months.
An upward movement in the ratings could arise following a significant improvement in the bank’s capitalisation. In addition, we would expect to see minimal adverse credit migration especially from the restructured loans, continued strengthening of the credit risk metrics (NPL ratio and credit losses) and phasing away of the breaches of the regulatory single obligor limit. Negative rating action may follow should the bank’s high RwA growth materially weaken its capitalisation metrics, as well as a deterioration in asset quality over the rating horizon.
|Primary analyst||Abdul Mukhtar||Financial Institutions Analyst|
|Lagos, NG||Abdullahim@GCRratings.com||+2341 904 9462|
|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, October 2021|
|GCR Financial Institutions Sector Risk Score, February 2021|
Fidelity Bank Plc
Risk score summary
|Rating Components & Factors||Risk Scores|
|Country risk score||3.75|
|Sector risk score||3.50|
|Management and governance||0.00|
|Capital and Leverage||(0.75)|
|Funding and Liquidity||0.50|
|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.|
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 Plc. 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 Plc 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 Plc and other reliable third parties to accord the credit ratings included:
- The audited financial results to 30 June 2021
- Four years of comparative audited numbers
- Other related documents.