Fidelity Bank Plc’s long-term issuer default rating (IDR) has been upgraded to ‘B’ from ‘B-’ with a stable outlook by international rating agency, Fitch Ratings, reflecting the bank’s increased creditworthiness.
The latest upgrade in Fidelity Bank’s rating which was issued at the weekend reflects bank’s improving business profile and resilient financial metrics, Fitch stated. The rating agency also upgraded Fidelity’s National Long-Term Rating to ‘A(nga)’ from ‘BBB+(nga)’.
According to the rating note, the upgrade reflected the bank’s increased creditworthiness relative to other issuers in Nigeria. “Fidelity’s Long- and Short-Term IDRs are driven by its standalone creditworthiness, as expressed by its Viability Rating (VR) of ‘b’.
“The VR reflects healthy asset quality, good business profile and reasonable capitalisation and liquidity. These are balanced against high sensitivity to Nigeria’s challenging operating environment as well as higher credit concentration as a percentage of equity and weaker profitability than larger domestic-rated peers,” it said.
On the downside to operating conditions, the rating agency said: “rising global risks will weaken domestic operating conditions. Inflation is expected to remain stubbornly high, posing downside risks to our real GDP growth forecasts of 3.4 per cent in 2022 and 3.1 per cent in 2023. However, downside risks are somewhat mitigated by strong oil prices, which should also underpin growth in non-oil sectors and asset quality.”
Fitch noted that being the sixth largest bank in Nigeria, representing about six per cent of banking system assets at end of 2021, Fidelity’s “strong balance sheet growth in recent years has improved market shares, which should rise further but remain below the five largest banks.”
It however pointed out the high credit concentrations of the bank, saying “single-borrower credit concentration is high, with the 20 largest customer loans representing 43 per cent of gross loans and 270 per cent of Fitch Core Capital (FCC) at end-2021. This exposes the bank to event risk. Exposure to the oil and gas sector is also high, representing 26 per cent of gross loans and 160 per cent of FCC.
“Fidelity’s stage 3 loans ratio at 2.8 per cent at end-1Q22, has been supported by strong lending growth and is below the banking sector average. Specific loan loss allowance coverage of impaired loans at 72 per cent at end-1Q22, is healthy in view of collateral coverage. We expect the bank’s impaired loans ratio to remain at around three per cent in 2022-2023, supported by stable operating conditions.
“Operating returns on risk-weighted assets (RWA) have averaged 2.1 per cent over the past four full years. They improved to 2.5 per cent in 2021 from 2.1 per cent in 2020, supported by a significant reduction in impairment charges. We expect profitability to continue improving on the back of higher interest rates and stable credit performance.
“Fidelity’s FCC ratio at 18.6 per cent at end-1Q22, is higher than most Nigerian medium and small banks and is considered adequate in view of its risk profile. The ratio declined from 19.1 per cent at end-2020 as a result of strong loan growth and lower internal capital generation driven by mark-to-market losses of N5 billion or two per cent of equity.
“The customer deposit base comprises a fairly high percentage of current and savings accounts, 75 per cent of total deposits at end-2021 and a moderate proportion of consumer deposits (26 per cent).
“Accordingly, single-depositor concentration is high. Non-deposit funding is high by domestic standards, around 30 per cent of total funding at end-2021), reflecting Eurobond issuance of $800 million and funds for on-lending raised mainly from the Central Bank of Nigeria.”
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