October 6, 2020/Fitch Ratings

Fitch Ratings has affirmed Fidelity Bank Plc’s ratings, including the bank’s Long-Term Issuer Default Rating (IDR) at ‘B-‘, and removed them from Rating Watch Negative (RWN). The Outlook is Stable.

The removal of the RWN on Fidelity’s Long- and Short-Term IDRs, Viability Rating (VR) and National Ratings reflects Fitch’s view of receding near-term risks to the bank’s credit fundamentals from the economic fallout arising from the oil price slump and coronavirus pandemic.

In our opinion the impact of the economic downturn on Fidelity’s credit profile is tolerable at the current rating level and it will take several quarters before the full extent of the crisis on corporates and households is seen in its financial metrics. Since the previous rating action in March, regulatory forbearance on asset classification and banks’ own debt relief measures have significantly eased the sector’s asset-quality pressures. Debt-relief measures are, nevertheless, temporary and with the eventual easing of fiscal and monetary support from the Central Bank of Nigeria (CBN), we see a material risk that bank asset quality could deteriorate faster, unless economic recovery gathers pace.

The Stable Outlook on Fidelity’s Long-Term IDR reflects our view that the bank’s rating has sufficient headroom at this level to absorb moderate shocks from sustained downside risks to the operating environment, the heightened level of risk in doing banking business and resulting risks to its financial performance over the next 12-18 months.

Key Rating Drivers

The IDRs of Fidelity are driven by its standalone creditworthiness, as expressed by its ‘b-‘ VR. The VR considers the bank’s exposure to Nigeria’s (B/Stable) volatile operating environment, a moderate franchise, weak asset quality, adequate profitability and sound capitalisation, which provides good capacity to absorb credit losses from the downturn. Asset-quality erosion has been moderate to date.

Fidelity is a second-tier Nigerian bank, accounting for 6% of domestic banking system assets and customer deposits at end-2019. Despite having an international license, Fidelity operates exclusively in Nigeria.

Similar to peers, credit concentration is a key risk. Single-borrower concentration is high, with the 20-largest customer exposures at 249% of Fitch Core Capital (FCC) at end-1H20. Furthermore, sector concentration is high, with exposure to oil and gas (half of which is to the upstream segment) representing 24% of gross loans or 131% of FCC. High exposure to the upstream oil and gas sector poses a significant risk to asset quality in the event of a prolonged period of low oil prices and production cuts.

Fidelity’s impaired loans (Stage 3 loans under IFRS 9) increased to 4.8% of gross loans at end-1H20 (from 3.3% at end-2019) as a result of the classification of several loans, in particular manufacturing and oil and gas exposures, as impaired. Specific coverage of impaired loans (57% at end-1H20) is adequate in view of collateral coverage and recovery expectations. Fidelity continues to have a large stock of Stage 2 loans (23% of gross loans at end-1H20) that are concentrated by single borrower and derived from troubled sectors such as power and oil and gas.

A comparatively high percentage of lending (33%) is subject to repayment moratoria due to Fidelity’s greater lending to SMEs through intervention programmes. Fitch believes that these may feed through to higher impaired loans. Net loans were 50% of total assets. Other assets are moderate- to low-risk, dominated by cash items and Nigerian government debt.

Fidelity delivers adequate profitability, as highlighted by an average operating profit/RWAs of 1.8% over the past four years. Profitability metrics are considerably lower than higher-rated peers’ due to a weak net interest margin (NIM) and high cost-to-income ratio. Operating profit/RWAs declined to 2% in 1H20 (on an annualised basis) from 2.4% in 2019 as a result of large loan impairment charges (LICs) incurred in response to the economic impact of the pandemic. Pre-impairment operating profit provides a good buffer to absorb a potential spike in LICs.

Fidelity has a high FCC ratio (18.4% at end-1H20) that compares favourably with most similar-sized peers’. However, capitalisation is assessed in the context of high country and credit concentration risks and a large stock of lowly-provisioned Stage 2 loans. Fidelity’s total capital adequacy ratio (18.8% at end-1H20, including the full impact of IFRS 9) is comfortably above the 15% minimum regulatory requirement.

Fidelity’s loans/customer deposits ratio (90% at end-1H20) is higher than peers’, explained by a greater volume of non-deposit funding (27% of non-equity funding at end-1H20), in particular a USD400 million eurobond maturing in 2022 and funds for on-lending, which are low-cost and carry a tenor of up to 20 years. Single-depositor concentration is high, with the 20-largest depositors accounting for 22% of customer deposits at end-1H20. Liquidity coverage is comfortable in both local and foreign currencies.

Senior Debt

Senior debt issued by Fidelity is rated at the same level as the bank’s IDRs because in our view, the likelihood of default on these notes reflects that of the bank. The Recovery Rating on these notes is ‘RR4’, indicating average recovery prospects.

Support Rating And Support Rating Floor

Sovereign support to banks cannot be relied on given Nigeria’s weak ability to provide support, particularly in foreign currency. 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.

National Ratings

Fidelity’s National Ratings reflect the bank’s creditworthiness relative to that of other issuers in Nigeria and are driven by the bank’s standalone strength. They are at the middle of the Fitch scale, primarily reflecting a weak financial profile compared with higher-rated banks’ and sound capital metrics relative to lower-rated banks’.

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

• Upside to the ratings is unlikely at present and would require a material improvement in operating conditions.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

• Impaired loans ratio increases significantly to above 10% due to the crystallisation of high credit concentration risks or problems with its comparatively large debt-relief book, resulting in considerable bottom-line losses and erosion of capital buffers, with FCC ratio remaining between 10%-12% for a sustained period.
• Severe tightening in the bank’s foreign-currency liquidity.

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.