Fitch Ratings has upgraded Fidelity Bank PLC’s Long-Term Issuer Default Rating (IDR) to ‘B’ from ‘B-‘. The Outlook is Stable. The upgrade reflects Fidelity’s improving business profile and resilient financial metrics.
Fitch has also upgraded Fidelity’s National Long-Term Rating to ‘A(nga)’ from ‘BBB+(nga)’, reflecting the bank’s increased creditworthiness relative to other issuers in Nigeria. A full list of rating actions is below.
Fitch has withdrawn Fidelity’s Support Rating and Support Rating Floor as they are no longer relevant to the agency’s coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned Fidelity a Government Support Rating (GSR) of ‘no support’ (ns).
KEY RATING DRIVERS
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.
Downside to Operating Conditions: Rising global risks will weaken domestic operating conditions. Inflation (17.7% in May 2022) is expected to remain stubbornly high, posing downside risks to our real GDP growth forecasts of 3.4% in 2022 and 3.1% in 2023. However, downside risks are somewhat mitigated by strong oil prices, which should also underpin growth in non-oil sectors and asset quality.
Growing Franchise: Fidelity is the sixth-largest bank in Nigeria, representing about 6% of banking system assets at end-2021. Strong balance sheet growth in recent years has improved market shares, which should rise further but remain below the five largest banks.
High Credit Concentrations: Single-borrower credit concentration is high, with the 20 largest customer loans representing 43% of gross loans and 270% 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% of gross loans and 160% of FCC.
Improving Asset Quality: Fidelity’s stage 3 loans ratio (2.8% 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 (72% at end-1Q22) is healthy in view of collateral coverage. We expect the bank’s impaired loans ratio to remain at around 3% in 2022-23, supported by stable operating conditions.
Reasonable Profitability: Operating returns on risk-weighted assets (RWA) have averaged 2.1% over the past four full years. They improved to 2.5% in 2021 from 2.1% 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.
Adequate Capitalisation: Fidelity’s FCC ratio (18.6% 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% at end-2020 as a result of strong loan growth and lower internal capital generation driven by mark-to-market losses (NGN5 billion/2% of equity).
Good Liquidity Coverage: The customer deposit base comprises a fairly high percentage of current and savings accounts (75% of total deposits at end-2021) and a moderate proportion of consumer deposits (26%). Accordingly, single-depositor concentration is high. Non-deposit funding is high by domestic standards (around 30% of total funding at end-2021), reflecting Eurobond issuance (USD800 million) and funds for on-lending raised mainly from the Central Bank of Nigeria.
No Support: Sovereign support to commercial banks cannot be relied upon, given Nigeria’s weak ability to provide support, particularly in foreign currency. The GSR is therefore ‘no support’, reflecting our view that senior creditors cannot rely on receiving full and timely extraordinary support.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A combination of an increase in the impaired loans ratio above 10% and aggressive growth that results in very thin buffers over regulatory capital requirements or a sharp decline in the FCC ratio.
A sovereign downgrade would result in a downgrade of the Long-Term IDR, given that Fidelity does not meet Fitch’s criteria to be rated above the sovereign.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the Long-Term IDR would require a sovereign upgrade, a material reduction in credit concentration by single borrower and to the oil and gas sector, a significant improvement in profitability with operating profit/RWA sustainably above 3%, and a larger franchise.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Fidelity’s senior unsecured notes are rated in line with its Long-Term IDR because in our view the likelihood of default on these reflects that of the bank. The Recovery Rating of these notes is ‘RR4’, indicating average recovery prospects.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Fidelity’s senior unsecured debt rating would be downgraded if its Long-Term IDR was downgraded.
Fidelity’s senior unsecured debt rating would be upgraded if its Long-Term IDR was upgraded.
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. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visitwww.fitchratings.com/esg