December 10, 2018/Fitch Ratings
Fitch Ratings has affirmed Fidelity Bank PLC’s Long-Term Issuer Default Rating (IDR) at ‘B-‘. The Outlook is Stable. Fitch has also affirmed Fidelity’s National Long-Term Rating at ‘BBB(nga)’. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRs, VIABILITY RATING, NATIONAL RATINGS AND SENIOR DEBT
The IDRs of Fidelity are driven by its standalone creditworthiness, as defined by its Viability Rating (VR). Fidelity’s VR, as with that of other Nigerian banks, is highly conditioned by Nigeria’s operating environment, with the fragile economic recovery restraining banks’ growth prospects and asset quality. Fidelity’s VR further reflects a moderate franchise, weak profitability, potentially vulnerable asset quality, some weaknesses in the bank’s funding and liquidity profile as well as adequate capitalisation.
The Stable Outlook reflects Fitch’s base case expectation that Fidelity’s credit profile is unlikely to change significantly over a one-to-two year period.
Fidelity operates exclusively in Nigeria, accounting for 4% of banking system assets at end-2017.
Fidelity’s impaired loans (stage 3 loans under IFRS 9) ratio (7.5% at end-1H18) is slightly lower than the sector average. However, Stage 2 loans are high, measuring at 21% of gross loans at end-1H18, as is the case for many Nigerian banks. Reserve coverage of impaired loans (88% at end-1H18) increased significantly following the implementation of IFRS 9, which we view positively.
Fidelity is exposed to large credit concentrations. The 20-largest loans represented 53% of gross loans and 252% of Fitch Core Capital (FCC) at end-1H18. Fidelity is also exposed to the oil sector, which accounted for 23% of gross loans at end-1H18.
Profitability is weak, but in line with most similarly-sized peers’. Fidelity’s operating profit/risk-weighted assets ratio was 1.8% in 2017, which is weak by emerging markets standards. Weak profitability metrics reflect a low net interest margin, given a high cost of funding that is reflective of Fidelity’s more expensive deposit base. Weak profitability also reflects a high cost-income ratio (68% in 2017) and loan impairment charges that have eroded around 30%-40% of pre-impairment operating profit in recent years.
We view Fidelity’s capital position as no more than adequate with a FCC ratio of 16.8% at end-1H18. Capital, in our view, is vulnerable to deterioration in asset quality.
Fidelity’s loans/customer deposits ratio (92% at end-1H18) is higher than peers’, explained by a higher proportion of non-deposit funding. Fidelity issued a five-year senior unsecured USD400 million bond in 2017, easing its foreign currency liquidity position. Of this, USD256 million was used to repay a USD300 million Eurobond in May 2018. Near-term debt repayments are limited, with the next large repayment being in 2022 when the Eurobond becomes due.
Single-depositor concentration is in line with peers’, with the 20 largest customer deposits accounting for 20% of the total at end-1H18.
Fidelity’s National Ratings reflect the bank’s creditworthiness relative to Nigerian peers’.
Fidelity’s senior unsecured debt is rated in line with the bank’s Long-Term IDR and, therefore, has been affirmed at ‘B-‘. In Fitch’s view, the likelihood of default on these instruments reflects the likelihood of default of the bank. The Recovery Rating (RR) of ‘RR4’ indicates average recovery prospects in case of default.
SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch believes that sovereign support to Nigerian banks cannot be relied upon given Nigeria’s weak ability to provide support, particularly in foreign currency. In addition, there are no clear messages of support from the authorities regarding their willingness to support the banking system. Therefore, the Support Rating (SR) and Support Rating Floor (SRF) are ‘5’ and ‘No Floor’, respectively. 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.
RATING SENSITIVITIES
IDRS, VIABILITY RATING, NATIONAL RATINGS AND SENIOR DEBT
Fidelity’s Long-Term IDR is sensitive to a change in its VR. Downside pressure is most likely to result from a material weakening of loan credit quality, including the migration of stage 2 loans to stage 3, putting pressure on capital adequacy. A positive rating action is unlikely in the foreseeable future.
Fidelity’s National Ratings are sensitive to a change in the bank’s creditworthiness relative to Nigerian peers’.
Fidelity’s senior unsecured debt rating is sensitive to a change in the bank’s Long-Term IDR.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are sensitive to a change in assumptions around the propensity or ability of the sovereign to provide timely support.
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-‘
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘No Floor’
National Long-Term Rating affirmed at ‘BBB(nga)’
National Short-Term Rating affirmed at ‘F3(nga)’
Long-term senior unsecured debt affirmed at ‘B-‘/’RR4’