February 9, 2018 /13:07 PM /Fitch Ratings
Fitch Ratings has affirmed Fidelity Bank PLC's Long-Term Issuer Default Rating (IDR) at 'B-'. The Outlook is Stable. The bank's Viability Rating (VR) has been affirmed at 'b-' and Support Rating at '5'. Fitch has also affirmed the National Ratings. A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
IDRS, National Ratings AND VR
The bank's IDRs are driven by its standalone creditworthiness, as defined by the VR.
Fidelity is a medium-sized bank, with a market share of around 4%-5% of domestic loans and deposits. Its small franchise limits the size and scope of business it can undertake and the bank has developed a niche focus on selected corporate business sectors and relatively underbanked sectors, such as the financing of SMEs. Fidelity operates solely in Nigeria.
Lending to SMEs in Nigeria requires more flexible underwriting standards to address their limitations and underwriting standards are adapted to meet the needs of the bank's niche customer base. Despite a focus on SMEs, Fidelity's impaired loans/total loans ratios (5.9% at end-September 2017) are broadly in line with the average for rated second-tier Nigerian banks (around 6.5%). Asset quality trends are favourable, reflecting loan restructuring and some recoveries in 2017. The sustainability of this trend will become clear over time.
Fidelity's earnings and profitability ratios are in line with the sector averages although performance metrics for second-tier banks vary considerably. There were some positive earnings developments in 2017. Margins are improving, loan impairment charges are reducing as a percentage of pre-impairment operating profit and investments in technology are helping to improve cost/income ratios.
Fidelity's funding profile is fairly typical of a smaller Nigerian bank. Franchise limitations make deposit collection more difficult and Fidelity's loans/deposit ratio hovers around 100%. Depositor concentrations are fairly high, with the top 10 deposits typically representing about 13% of total customer deposits. Low-cost demand and savings deposits represent around 75% of customer deposits, which is positive. Naira liquidity ratios are at levels that are marginally above the 30% regulatory minimum.
Access to foreign currency (FC) was particularly tight for Nigerian banks in 2016 but Fidelity did not delay any payments on its FC trade-related and bank obligations, even at the height of the liquidity squeeze. The FC liquidity situation eased in Nigeria throughout 2017 and in October Fidelity raised a senior five-year USD400 million bond on the international capital markets. This has eased the bank's FC liquidity position. Funds raised were partly used to repay USD256 million of a USD300 million Eurobond bond originally maturing in May 2018.
Loan loss cover ratios (68% at end-September 2017) are slightly lower than peer averages (75% - 80%).
Fidelity meets minimum 15% capital ratios requirements, but the bank's ability to withstand even moderate shocks may be limited considering below average loan-loss cover ratios, high single name concentrations and potential asset-quality deterioration.
Fidelity's National Long-Term Ratings reflect its creditworthiness relative to the country's best credit and to peers operating in Nigeria.
Fidelity's senior unsecured bonds are rated in line with the bank's IDRs. In our view, the likelihood of default on these notes reflects the likelihood of default of the bank. The Recovery Rating (RR) assigned to these bonds is 'RR4', indicting average recovery prospects.
Support Rating And Support Rating Floor
Fitch believes that sovereign support to Nigerian banks cannot be relied on given Nigeria's (B+/Negative) weak ability to provide support, particularly in FC. In addition, there are no clear messages from the authorities regarding their willingness to support the banking system. Therefore, the Support Rating Floor (SRF) of all Nigerian banks is 'No Floor' and all Support Ratings (SR) 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.
IDRS, National Ratings and VR
Fidelity's IDRs and National Ratings are sensitive to a rating action on the bank's VR. Upside potential is unlikely in the near term due to the economic pressure on the Nigerian operating environment. Downside pressure is most likely to be triggered by a material worsening in asset quality, but given recent positive trends, this is not our base case.
SR and SRF
The SR is potentially sensitive to any change in assumptions around the propensity or ability of the sovereign to provide timely support to the bank.
Fidelity's senior debt rating is sensitive to a change in the bank's Long-Term IDR.
The rating actions are as follows:
Long-Term IDR affirmed at 'B-'; Outlook Stable
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
National Long-Term Rating: affirmed at BBB(nga)'
Short-Term National Rating affirmed at 'F3(nga)'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'NF'
Long-Term Senior Unsecured Debt affirmed at 'B-'/RR4
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