S&P Affirms Fidelity Bank Ratings, Raises Concerns on High Loan Concentration


By Dipo Olowookere

One of the top rating agencies in the world, S&P Global Ratings, has announced affirming its ‘B-‘ long-term and ‘B’ short-term issuer credit ratings on Nigeria-based tier-two lender, Fidelity Bank Plc with a stable outlook.

In a statement issued last Friday and obtained by Business Post, the rating company said it was also affirming its ‘ngBB+/ngB’ Nigeria national scale ratings on the bank.

S&P explained that the affirmation reflects its view that the 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.

It noted that although an improvement in systemwide US Dollar liquidity–due to higher oil prices and increased oil and gas production–has eased the pressure on Nigeria’s manufacturing and trade sectors, some corporate entities still suffer from the effects of the foreign currency shortages over the past 24 months.

S&P stressed that the ratings reflect the lender’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 (about $45.6 million) charge on capital for exceeding its single-obligor limit, and the amortization of its subordinated local bond.

The rating firm said it expects the single-obligor charge to drop 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 statement said.

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.

“Over the next 12-18 months, we forecast that 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,” it added.

As of March 31, 2018, Fidelity Bank’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.

The lower NPL ratio is mainly attributable to debt reduction in the upstream oil and gas sector, which the rating agency expects will continue over the next 12 months, while the higher coverage was due to the initial IFRS 9 application.

S&P said looking ahead, despite the higher expected coverage ratios, the bank’s high loan concentration and foreign currency exposures remain a concern; at year-end 2017, pointing out that 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.

“Notwithstanding the relatively high cost of funding, the bank benefits from a stable funding base and adequate liquidity buffers, which compare well with peers’.

On December 31, 2017, the bank’s stable funding ratio was 112 percent and liquid assets covered short-term wholesale funding 6.9x.

“However, similar to other banks operating in Nigeria, Fidelity Bank’s deposit base is confidence sensitive, due to its contractually short-term nature.

“The stable outlook reflects our expectation that the bank will maintain its prudent underwriting standards, its CAR above the minimum regulatory requirement despite the IFRS 9 implementation, and adequate liquidity over the next 12 months,” it said.

S&P stressed that it could lower the ratings over the next 12 months if asset quality deteriorates by more than the sector average, and concentration risk materializes through a default of large exposures, adding that a positive rating action is unlikely in the next 12 months and would require a material improvement in macroeconomic conditions, coupled with stronger capitalization than it currently expects, with the RAC ratio sustainably exceeding 7 percent.

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