Fidelity Bank to moderate loan growth; says won’t block merger, acquisition talks
After five years of aggressively building its loan book, Fidelity Bank Plc has said it would limit growth in loan and advances in the second half of the financial year 2019.
It would be recalled that at the time when its peers in the sector were largely bearish on the economy, the bank was expanding credits book.
In the last few years, juicy yield in the fixed income market attracted many of its peers and massive funds were channeled into government securities, but Fidelity was largely bullish extending credits to the real sector of the economy.
In the first half of 2019, the bank grew loan book by 17.6% as it closed the period with 15.7% increase in pretax profit to N15.1 billion.
The management said: “while we are not going to slow down significantly; obviously, the market is not going to see an aggressive increase in the loan growth between now and the end of the financial year”.
With total loans and advances at N1 trillion, analysts wondered as to why the bank decide to buck trend. Its non-performing loans receded, as retail credits as proportion of loan book spiked up till the end of the first half.
Some analysts sought to know if the bank would be able to maintain independent as the apex bank seeks to increase capital base of banks operating in the country.
Nnamdi Okonkwo, the Managing Director/Chief Executive Officer while reacting to analysts on whether Fidelity bank would remain independent or partner with a larger peer on the back of the apex bank plan to recapitalise the sector, said the bank 5-year strategy to 2022 was actually crafted around organic growth.
However, he said: “We won’t shut out to any discussions at all. So long as it aligns with our strategies and so long as we see synergy, we can consider whatever option comes our way and then keep the market informed”.
“But as it stands, we have crafted the 5-year strategy around organic growth. But again, I repeat we’ll not just block ourselves away from whatever comes up”, he added.
Okonkwo said on the loan growth, I think over the last 4 -5 years, we have consistently continued to lend even when you strike out the effects of devaluation on the loan book.
He said that intervention funds cover quite a bit of sectors. Obviously, the manufacturing sector has been one of the better beneficiaries. In the Oil & Gas segment, we’ve also seen an uptick in activity when the oil pricing improved from a services perspective.
On loan book, Victor Abejegah, the Chief Finance Officer said, “The bank guidance for the year was actually 7.5% to 10%. We don’t expect to have a loan growth of 35% by the end of the financial year, having done 17.6% in the first half”.
“If we repeat the same thing in the second half, then we’ll be having a growth of 35%. Obviously, we don’t intend to have that. So the loan growth would be slower in the next two quarters”, he added.
Analysts commend the bank for bucking trend with it resolves to be bullish on the economy by creating risk assets. However, they noted that bank’s first half performance was heavily tilted with high cost to income ratio (CIR).
Abejegah said on CIR guidance, obviously, that’s going to be a combination of two things: higher revenues and keeping cost growth in check.
“If you look at some of the lines that have been responsible for the cost growth over this period, NDIC is one of them. AMCON is one of them. Those basically come with the growth in the business.
“We believe for third and fourth quarters, we should see an improvement in CIR. The major proposition for us is checking it below 70% for the end of the financial year. It will be quite challenging, but that’s what we intend to focus on”, he added.
Total assets closed at N1.94 trillion in the first half 2019. Representing about 12% growth from where it ended in 2018. Foreign currency loans were 39.1% of the loan book, it was 41% by the end of the last financial year, and that’s due to the stronger growth in the local currency loan book.
The management stated that customer deposits are getting closer to the N 1.1 trillion mark basically driven by both local and foreign currency deposit growth. It added that domiciliary deposits are now about 20% of total deposits at about N216 billion.
It noted that regulatory cost pushed its operating expenses. The result shows that expenses surged by 16.9% to N38.2 billion in the period. The management however said staff costs, NDIC, AMCON and advert were responsible for almost 80% of the growth in operating expenses.
Now, total currency deposit is roughly about 80% of the deposit base. We’ve seen strong growth from the foreign currency deposit based from about NGN 113 billion in the first half of 2018, and it’s almost doubled to N216 billion the first half of 2019, the bank CFO said.
The bank’s net interest margin came in at 5.8%. It’s flat when you compare it to the 2018 financial year, but was an improvement on the 5.1% we recorded in the first quarter basically due to the improvement in the yield on earning assets to 13.5% over the period. This was driven by a 22% growth in interest income in the second quarter.
Speaking on the net interest margin guidance for the year, the management said for third quarter, they have seen obvious pressure from a lending perspective in terms of banks wanting to meet the 60% threshold.
However, “We’ve seen customers that offered far lower interest rates. But we’re seeing a reversal of that now obviously because the yields on the instrument also going up.
“We also expect the yields on fixed income security to increase in fourth quarter in view of the higher maturities. We believe that with those increased in those yields; it will moderate some of the pressures we’re seeing from a lending perspective by the time we get into fourth quarter.
“That should be positive for us. Remember, in our own scenario, we are not under pressure to go out and create a lot of new loans. It’s more about defending the market share on the customers we have. And I think so far, so good. We’ve done that fairly well”, Abejegah said.
Fidelity bank said that over the last six months, account acquisition has grown by 7%. Savings deposit base is up by 9%, and the bank has seen an uptick in the retail loan book by about 4%.
The management stated that retail loans are gradually picking up with the launch of some of our new digital lending products. We launched a new product, Fidelity FastLoan, to keep up for different segments.
According to the bank, 45% of the customers now in mobile and Internet banking channel, 82% of customer transactions are done on electronic channels. From a retail deposit perspective, it contributes 40% of low cost deposits.
Okonkwo said, “If we look at liquidity position, net loans to customer deposits are about 69.7%. Liquidity ratio is about 35%. And if you look at the mixture of our liquid assets, there’s no over concentration in any box, so you can take advantage of maturity if there are positive variances in an interest rate movement”.
The bank also recorded increased foreign currency deposits. In terms of domiciliary deposit growth, revealed that three things are driving it: one is we’ve seen a lot of growth from the retail segment on that.
He added that, on mobile app, there was integration indeed with suites when you do domiciliary transfers to any bank in the world and it takes roughly about 15, 20 minutes. So it’s almost instant.
The bank has seen an increase in the level of liquidity of the customers we have in the Oil & Gas segment. Obviously, that has been driven by the higher oil prices. And the cash flow of these customers has improved.
Okonkwo said that the bank performance for the period showed a decent double-digit growth on key performance indices, like gross earnings, fee income, profitability, loans, deposits and equity.
Our risk assets increased by 17.6% year-to-date to N999.3 billion and this was strongly driven by four key sectors that accounted for 95%, and those sectors are manufacturing, transport, agriculture and oil and gas, Okonkwo added.
“Of course, manufacturing is one of the largest beneficiaries of intervention funds for all lending facilities, and this has been one of the key strategies we use to access alternative and cheaper funding for our clients to drive business”, the bank chief said.
The bank non-performing loans improved to 5.4%, from 5.7% in financial year 2018 due to growth in the gross loan book, which was about 15.8%.
The management said, “NPL guidance for the year still remains below as expected, and we are working hard to achieve that. The management said that key factors responsible for growth in Stage-3 loans were oil and gas, manufacturing and general commerce”.
The management said capital adequacy ratio is 17% which above regulatory and internal guidance as liquidity ratio heads to 35%. However, the bank said it only recognises 40% of its local debt in the Tier-2 capital computation.
In his words, Gbolahan Joshua Chief Operating Officer said: “Right now, we are recognizing only 40% of the local currency bond. And then loans to interest bearing liabilities are about 65.8%, with total equity at about N 216 million”.
“CAR improved to 17% because of an N11.4 billion growth in Tier 1 capital, a N10.2 billion growth in fair value reserves and then the single obligor limit charge we take reduced by N4.5 billion because of the growth in our single obligor limits over the period due to the capitalization of earnings”, he added.
Gbolahan said, “Cost to income ratio is at cross point, so we have our eyes on the ball. We are working hard to make sure that we will bring it down. We are not unaware of the importance of making sure that we bring down that cost to income ratio”.
Fidelity Bank to moderate loan growth; says won’t block merger, acquisition talks