The Long-Term Issuer Default Rating (IDR) of Fidelity Bank Plc has been affirmed by Fitch Ratings at ‘B-‘ with a stable outlook.
A statement issued by the rating agency explained that the IDRs of the mid-level Nigerian lender are driven by its standalone creditworthiness, as expressed by its ‘b-‘ Viability Rating (VR).
However, it noted that the loan quality remains weak as the bank’s impaired (Stage 3 under IFRS 9) loans ratio (5.4 percent at end-1H19) is low relative to the sector average, but a large stock of Stage 2 loans (20 percent of gross loans at end-1H19) that are concentrated by single-borrower and derive from troubled sectors such as power and oil and gas, present a risk to Fidelity Bank’s financial profile.
Fitch stressed that specific loan loss coverage of impaired loans (49 percent at end-1H19) is low as explained by management’s view of collateral valuation, but broadly in line with peers.
According to the statement, the VR of the bank reflects its size as highlighted by market shares of loans and deposits of around 4 percent.
But Fitch said it expects the market share to increase in line with management’s growth strategy, pointing out that the financial institution has a high cost of funding that limits pricing power compared with larger peers.
It further said the profitability metrics of the lender are adequate, with operating returns over risk-weighted assets averaging 1.6 percent over the past four years.
“Profitability metrics tend to exceed those of similar sized peers, given that Fidelity Bank has not experienced the particularly high loan impairment charges that other banks have incurred.
“Profitability continues to be constrained by a relatively weak net interest margin, which is explained by a high cost of funding and a low interest spread on Fidelity Bank’s increasing on-lending activities, in addition to a high cost-income ratio,” it said.
It further said the solvency of the bank is adequate because the company’s FCC ratio (15.6 percent at end-1H19) compares favourably with similar sized peers, but should be considered in the context of high single-borrower concentration and a large stock of Stage 2 loans.
Fitch noted that the bank’s loans/customer deposits ratio (96 percent at end-1H19) is higher than peers, but explained by a greater volume of non-deposit funding (31 percent of non-equity funding at end-1H19), in particular a $400 million Eurobond maturing in 2022 and funds for on-lending, which are low-cost and carry a tenor of up to 20 years.
“A higher proportion of longer-term funding serves to reduce asset and liability maturity mismatches, which are comfortably covered by holdings of liquid assets. This is balanced against high single-depositor concentration (in particular in US dollars) and a reliance on less stable deposit funding,” it said.