Fitch Upgrades Outlook on Fidelity Bank to Positive
Fitch Ratings has certainty of fulfilment of Fidelity Bank Plc.’s financial obligations at ‘B-‘ and revised the outlook to positive from stable. The global rating agency also affirmed the bank’s national credit rating at ‘A (nga)’, and accorded an outlook on the lender as stable.
According to the rating note, the revision of the Outlook on Fidelity’s credit rating reflects Fitch’s expectations that the bank’s capitalisation will strengthen in the near term as a result of core capital issuances.
This includes Fidelity Bank’s current plan to meet the new paid-in capital requirement of N500 billion for banks with an international licence effective by the end of Q1-2026.
The agency said Fidelity Bank rating are driven by its standalone creditworthiness, as expressed by its viability rating (VR) of ‘b-‘. It further explained that the bank’s viability rating balances the concentration of operations in Nigeria’s challenging operating environment, very high credit concentration and high Stage 2 loans against a growing franchise, sound profitability metrics, good capital buffers and reasonable foreign-currency liquidity coverage.
Fitch explained that the bank national ratings was driven by its standalone creditworthiness. It added that they balance a growing franchise and good capital buffers against weaker profitability than higher-rated peers.
According to the rating note, Fidelity is Nigeria’s sixth-largest bank, representing 5% of domestic banking system assets in 2023. The rating note added that strong balance-sheet growth in recent years has increased its market shares.
“We expect these to increase further but remain below those of the five largest banking groups”, Fitch stated, adding the lender has high single-borrower credit concentration.
It stated the Fidelity Bank’s 20 largest customer loans represents 51% of gross loans and 450% of Fitch Core Capital at the end of first quarter of 2024. However, Fitch analysts said they expect concentration to moderate relative to capital due to capital raising.
Oil and gas exposure, which accounted for 34.4% of net loans in 2023 is considered high. Fitch also said Nigeria’s sovereign exposure through securities and Central Bank of Nigeria’s cash reserves is very high.
Fidelity’s impaired loans (Stage 3 loans under IFRS 9) ratio increased to 4.4% in Q1-2024 versus 2.9% in 2022, primarily due to the naira devaluation.
Stage 2 loans accounted for 29% of gross loans in Q1-2024, which are concentrated in the oil and gas and power sectors and largely US dollar denominated, remain high and represent a risk to asset quality. Fitch forecasts the impaired loans ratio to increase moderately in the near term.
The rating note stated that Fidelity Bank’s operating profit/risk-weighted assets (RWA) averaged 3.6% over the past four years, but profitability remains weaker than at some larger peers.
However, its operating profit/RWAs improved to 6.6% in 2023 from 3.4% in 2022 owing to a wider net interest margin (NIM), large foreign-exchange revaluation gains that accompanied the naira devaluation, and a declining RWA density.
The metric increased further to 8.6% in Q1-2024 due to further NIM widening, strong fees, and a continued reduction in the RWA density.
Fidelity Bank’s total capital adequacy ratio was 16.3% at the end of the first quarter of 2024, a modest buffer over the 15% minimum requirement.
However, Fitch expects capitalisation to strengthen materially in the near term owing to a rights issue due to be concluded in 2024 and further capital issuances to meet the new paid-in capital requirement of N500 billion for banks with an international licence by the end of Q1-2026.
The customer deposit base comprises a high percentage of low-cost current and savings accounts for 97% of customer deposits in 2023, supporting funding stability.
However, the bank’s single-depositor concentration is fairly high, with the 20 largest deposits representing 29% of customer deposits at the end of Q1-2024. Foreign-currency liquidity coverage is reasonable, Fitch Ratings stated. #Fitch Upgrades Outlook on Fidelity Bank to Positive
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