S&P rate Fidelity Bank high with stable outlook


Global ratings organization, Standard and Poor (S&P) has affirmed ‘B-‘ long-term and ‘B’ short-term issuer credit ratings on Fidelity Bank Plc with stable outlook.
The firm in its latest rate on the bank released last Friday also affirmed its ‘ngBB+/ngB’ Nigeria national scale ratings on Fidelity Bank.
The affirmation reflects S&P view that the Fidelity Bank will display relatively moderate earnings compared with the sector average, as demonstrated in 2017, and relatively stable asset quality amid a slow economic recovery in Nigeria.
Although an improvement in systemwide U.S. dollar liquidity due to higher oil prices and increased oil and gas production has eased the pressure on the country’s manufacturing and trade sectors, some corporate entities still suffer from the effects of the foreign currency shortages over the past 24 months, the rating agency said.
However, the ratings reflect Fidelity Bank’s modest size and position in the Nigerian banking
sector, characterized by a high cost base and sizable funding costs, which have constrained it from competing with certain top-tier banks in terms of profitability.
Fidelity bank’s regulatory capital adequacy ratio (CAR) declined to 16 percent at year-end 2017 from 17.2 percent in 2016, compared with the regulatory minimum of 15 percent. This was
attributable to N15.2 billion charge on capital for exceeding its single-obligor limit, and the amortization of its subordinated local bond.
“We expect the single-obligor charge will reduce over the next 12 months as the exposure is settled, and that the bank’s CAR will remain above the minimum requirement of 15 percent. We project that Fidelity Bank’s risk-adjusted capital (RAC) ratio before adjustments for diversification will decline to below 5 percent and range between 4 percent and 5 percent over the next 12-18 months, compared with 5.2 percent at year-end 2017. The bank’s initial application of International Financial Reporting Standard (IFRS) No. 9 resulted in a N28 billion reduction in total adjusted capital as of March 31, 2018. Our projected RAC ratio takes into account our expectation of low double-digit loan growth, measured underwriting standards, and a naira depreciation, combined with the necessity for growth to counterbalance the decline in government securities. We also anticipate good fee and commission revenue generation (supported by the bank’s digitalization strategy) and a cost-to-income ratio of around 70 percent.”
S&P forecasted that, over the next 12-18 months the bank’s cost of risk will be higher than historical levels, at around the 1.5 percent posted at year end-2017, as it implements IFRS 9. As of March 31, 2018, FBL’s nonperforming loans (NPL) had declined to 6.3 percent of gross loans from 6.6 percent in 2016, while loan loss reserves accounted for a higher 110 percent of gross loans compared with 51 percent at year-end 2016, S&P said.
It noted that, the lower NPL ratio of Fidelity Bank is mainly attributable to debt reduction in the upstream oil and gas sector, which we expect will continue over the next 12 months, while the higher coverage was due to the initial IFRS 9 application.
Looking ahead, the rating agency said, despite the higher expected coverage ratios, the bank’s high loan concentration and foreign currency exposures remain a concern; at year-end 2017, the top 20 loans accounted for 59 percent of total loans and foreign currency lending for about 46 percent.
“Nonetheless, we see as positive that foreign-currency denominated loans are typically backed by receivables in the same foreign currency.”