Monday, September 27, 2021 / 10:34 AM / by Fitch Ratings / Header Image Credit: Fidelity Bank
Fitch Ratings has affirmed Fidelity Bank PLC's Long-Term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook. The National Long-Term Rating has been upgraded to 'BBB+(nga)' from 'BBB(nga)', reflecting the bank's increased creditworthiness relative to other issuers in Nigeria.
Key Rating Drivers
IDRS and Viability Rating
Fidelity's IDRs are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR) of 'b-'. The VR reflects its concentration and sensitivity to Nigeria's challenging operating environment and is constrained by a moderate franchise, high credit concentrations, an aggressive growth appetite and asset quality pressures. These constraints are balanced against reasonable profitability, capitalisation and liquidity.
The Stable Outlook reflects Fitch's view that risks to Fidelity's credit profile are captured by the current rating, with sufficient headroom under our base case to absorb the fallout from operating environment pressures.
Operating conditions in Nigeria are gradually stabilising and Fitch forecasts 1.9% GDP growth in 2021, following a 1.8% decline in 2020. Our baseline scenario is that business volumes and earnings should continue to rebound in 2021, while the rally in oil prices is also a positive factor. Nevertheless, downside risks linger, given inherently volatile market conditions, with banks still exposed to foreign currency (FC) shortages, potential further currency devaluation, rising inflation and regulatory intervention by the Central Bank of Nigeria (CBN).
Fidelity is the sixth-largest bank in Nigeria, representing 6% of banking system assets at end-2020. Single-borrower concentration is high, with the 20-largest customer loans representing 253% of Fitch Core Capital (FCC) at end-1H21. Exposure to the oil and gas sector is also high, representing 26% of gross loans and 160% of FCC, and largely concentrated within the upstream and services segments, posing a significant risk to asset quality in the event of a prolonged period of low oil prices and production cuts.
Fidelity's impaired loans ratio (end-1H21: 2.7%) is among the lowest across the banking sector. It declined from 3.8% at end-2020, reflecting reclassifications but also strong loan growth. Loan growth has been the key driver of the fairly sharp decline in the bank's impaired loans ratio in recent years, but creates seasoning risks. Specific coverage of impaired loans (70%) is adequate in view of collateral coverage.
Restructured loans (end-1H21: 30% of loans; split 77%/20%/3% between Stage 1, 2 and 3) are material, largely reflecting on-lending facilities that were subject to mandatory restructuring at the onset of the pandemic. Stage 2 loans (20% of loans) - concentrated in the power and oil and gas sectors - were also high, although we do not expect them to become impaired given the improving outlook for these sectors.
Fidelity reports reasonable profitability, as indicated by operating returns on risk-weighted assets that have averaged 2.1% over the past four full years. Profitability weakened slightly in 2020 as result of pandemic-related loan impairment charges (LICs), but improved in 1H21 due to lower LICs, reflecting easing asset quality risks, despite net interest margin pressure mainly from lower yields on government securities.
Fidelity's FCC ratio declined 17.6% at end-1H21 from 19.1% at end-2020, eroded by strong loan growth. Internal capital generation was limited due to large mark-to-market losses on government securities held at fair value through other comprehensive income. Pre-impairment operating profit, which has averaged 3.2% of average gross loans over the past four full years, provides a moderate buffer to absorb loan impairment charges.
Fidelity's customer deposit base (end-1H21: 76% of non-equity funding) comprises a high percentage of demand and savings accounts (75%) and a moderate percentage of retail accounts. The loans/customer deposits ratio (81%) is fairly high by domestic standards, partly reflecting its higher loans/assets ratio and on-lending. Depositor concentration is significant, with the 20 largest depositors representing 27% of customer deposits. Liquidity coverage is good in both local and foreign currencies.
Senior Unsecured Debt
Senior unsecured debt is rated at the same level as the Long-Term IDR because in our view, the likelihood of default on these notes reflects that of the bank. The Recovery Rating assigned to these notes is 'RR4', indicating average recovery prospects.
Support Rating and Support Rating Floor
Sovereign support to commercial banks cannot be relied on given Nigeria's weak ability to provide support, particularly in foreign currency. The Support Rating Floor of all Nigerian banks is 'No Floor' and all Support Ratings are '5'. This reflects our view that senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable.
Fidelity's National Ratings reflect its creditworthiness relative to other issuers in Nigeria and are driven by its standalone strength. The upgrade of the National Long-Term Rating reflects its increased creditworthiness relative to other Nigerian issuers. Its National Short-Term Rating is the higher of the two possible options under Fitch's criteria, reflecting the relative strength of the bank's funding and liquidity profile, which reduces the vulnerability of default on its short-term local-currency obligations within Nigeria.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.