GCR Affirms Fidelity Banks Ratings with Stable Outlook
GCR Ratings has affirmed Fidelity Bank Plc’s national scale long- and short-term issuer ratings of A(NG) and A1(NG) respectively, with a stable outlook. Fidelity bank Plc rating affirmation balances a sound competitive position, good capitalisation, stable funding structure, and liquidity, against pressured risk profile due to the adverse impact of Naira devaluation, the rating note said.
According to GCR, Fidelity Bank’s competitive position is a positive rating factor, underpinned by long track record, strong domestic franchise, and market share, being the sixth largest banking group in Nigeria.
With a balance sheet size of N9.5 trillion or USD4.9 billion as of 30 September 2024, the group accounted for approximately 8.2% of the Nigerian banking industry’s total assets.
GCR stated that Fidelity Bank recently expanded its geographical coverage following the acquisition of a UK subsidiary, FidBank UK, which is expected to drive trade finance transactions and offshore lending over the medium to long term.
The rating note revealed that the group’s revenue remains stable, supported by the dominance of earnings from its core banking operations.
Operating revenue registered at N567.2 billion as at 30 September 2024 as against N386.6 billion in Dec 2023, with net-interest income accounting for 83.0% of operating revenues, up from 71.7% in 2023.
GCR said looking ahead, the bank’s geographical expansion plans could further support its competitive positioning and earnings over the rating horizon. Fidelity Bank’s capital and leverage is within the intermediate level, according to the rating note.
Despite the impact of the Naira devaluation on the group’s risk-weighted assets, the GCR core capital ratio inched up to 24.0% as of 30 September 2024 from 15.8% in Dec 2023 on the back of strong earnings generation and retention.
To comply with the new capital requirement for its license category in line with Central Bank of Nigeria’s (CBN) directive, the group recently concluded the first phase of its recapitalisation process, raising over N127 billion through a combination of right issues and public offer.
The proceeds are currently awaiting CBN’s verification, GCR said in the rating note, adding that this, together with strong earnings retention could further strengthen capitalisation metrics over the rating outlook, barring further significant devaluation in the local currency.
The rating note reads that Fidelity bank’s risk position reflects high obligor concentration, high stage 2 loans and high foreign currency (FCY) loans due to the impact of naira devaluation and general macroeconomic challenges.
While the non-performing loans (NPL) of 2.8% as of 30 September 2024 remained below regulatory limit, credit losses ratio of 1.7% also registered well below industry’s average of about 3.0%.
Analysts stated that due to the impact of naira devaluation, stage 2 loans to gross loans which historically averaged 19.5% increased to 33.2% as at 31 December 2023 and further to 41.1% as of 30 September 2024, largely consisting foreign currency loans to power sector and syndicated oil & gas sector loans.
GCR is of the opinion that the performance of these exposures remains pressured by the weak macroeconomic environment -Although the management indicated that the bulk of these stage 2 loans were restructured and are now performing in line with restructurer terms.
Also, counterparty concentration persists in the loan book, with the twenty largest obligor accounting for 56.0% of gross loans as of 30 September 2024, a significant increase from 47.0% in 2023.
GCR noted that six of these were in breach of regulatory single obligor limit of 20% of shareholder’s funds, due to the impact of naira devaluation.
The rating note stated that the group currently benefits from regulatory forbearance, with expectations that the planned recapitalisation could remediate the breaches over the rating outlook, barring any further devaluation in the local currency.
Fidelity Bank foreign currency loans to gross loans remained high registering at 54.8% as of 30 September 2024 versus 50.8% in 2024, GCR said.
As per management, Fidelity bank might convert some of these loans to local currency loans, contingent on the availability of foreign currency.
Looking ahead, the group’s risk profile may remain pressured by the weak operating environment, according to analysts.
Meanwhile, GCR said its assessment of funding and liquidity is positive to the rating, underpinned by a stable funding and sufficiently liquid balance sheet.
The group is largely funded by customer deposits, which constituted 86.1% of the total funding base as of 30 September 2024 as against 86.6% in Dec 2023.
The rating note revealed that Fidelity Bank customer deposits grew by 55.6% in December 2023 and a further 51.5% growth as of 30 September 2024 to register at N6.1 trillion or USD 3.8 billion.
The feat was supported by strong retail franchise and a low-cost deposit mobilisation strategy as lender leveraged on over 8 million customer base as well as the naira devaluation on foreign currency deposits.
Additionally, the relatively inexpensive current and savings account (CASA) deposits constituted a significant 94.9% of customer deposits as of 30 September 2024 from 98.1% in Dec 2023
The low-cost deposit supported the bank’s moderate cost of funds of 5.0% as at the same date, up from 4.0% in Dec 2023. The balance sheet is sufficiently liquid; GCR liquid assets coverage of customer deposits and wholesale funding registered at 47.3% and 2.9x respectively, as of 30 September 2024.
GCR now expects some strain in the Nigerian banking sector’s liquidity following the recent increase in cash reserve requirements (CRR) for commercial banks to 50.0%.
“Nevertheless, we expect the group’s liquidity ratio to remain within the regulatory threshold predicated on effective liquidity management and customer deposits mobilisation strategy.”.
GCR said the stable outlook reflects expectations that Fidelity Bank’s financial profile would remain strong despite the challenges in the operating environment.
“We expect NPL and credit losses ratios to be well contained over the rating horizon while funding and liquidity metrics remain stable,” the rating note added. #GCR Affirms Fidelity Banks Ratings with Stable Outlook Equities Investors Wealth Rises as Nigerian Exchange Rally
