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With global markets locked into uncertainty caused by geopolitical tensions, supply chain reconstruction, and economic realignments, banks globally have had difficulties navigating the international and local business environments. African banks have equally had to cope with foreign exchange volatility and worsening counterparty conditions, while in Nigeria, banks have had to handle restrictive monetary policy as the Central Bank of Nigeria (CBN) tries to tackle raging domestic inflation. A borderline Tier 1 bank like Fidelity Bank Plc gives insight into the travails and triumphs of emerging market banking institutions. 

Proshare’s 2023 Tier 1 banking report titled ‘Reassessing Tier 1 Banks: The New Class of 2023’ suggested that Fidelity Bank was a top-notch financial lender with a few temporary operational chokepoints. According to the report, ‘Our Banking sector report last year emphasised the fact that the only statutory classification of banks given by the regulator (CBN) is with respect to the Systemically Important Banks (SIBs) and Non-SIB classification and that while this met the needs of the regulator in ensuring a stable financial system, an SIB is not necessarily the same as a Tier 1 bank’. In-house analysts believe that regardless of the tight monetary policy regime, which has seen the banking sector’s cash reserve ratio rise to 45% from 32.5% in January 2024 and the CBN’s monetary policy rate (MPR) rise to 22.75% from 18.75% a month earlier, the bank would regain entry to the tier 1 league of banks as internal policy adjustments and dynamic balance sheet management appear to have supported improvements in its fiscal outlook the deposit money institution (DMB) back to its earlier tier 1 status (see illustration below). 

Illustration:

Since the last report was published, the bank has seen improvements in its Cost of Risk (CoR), Asset Quality (Non-Performing Loans Ratio (NPLR)), and Cost to Income Ratio (CIR). The improvements in the operating numbers mean that Fidelity Bank will return to the Tier 1 Status it achieved in the inaugural Proshare ranking of banks listed on the Nigerian Exchange Limited (NGX) in 2022. 

Emerging developments globally and in Nigeria indicate that while banks are likely to end up on the chopping block of changing consumer demand, banking will remain alive and well, but with several friendlier interfaces, digital interactivity, and customer-inspired innovation. Banking will become more agile, bespoke, and easier. In the new scheme of things, the relationship between a bank and its customer would be a series of interactive digital conversations rather than a hurdle of human filters. Customer service would mainly be self-service, and the future race for market share would be the race for digital superiority with the customer at the centre of service delivery. 

Running with the Wolves

The evolving banking industry has trimmed expectations of banks' survival to their ability to adapt and embrace technology. Some banks have lost their position to Neobanks, while others have stayed resilient by staying competitive and scaling upwards. Fidelity appears to be one of the banks that have taken up the gauntlet of technology-enhanced financial service delivery. It has not yet developed a market-beating digital or tech foundry, but some close to the institution who requested anonymity observed that ‘the bank plans to run with the front pack of corporate leaders. It recognises the need to shape the customer experience around shifting demography and new transactional priorities, suggesting that it cannot play ‘catch-me-if-you-can’ at the lower end of the banking table, where it would have to fight for costlier deposits and riskier customers. Running with the hares may not be disastrous, but it is much more dangerous than going with the wolf pack.’  

The bank recently expanded beyond the domestic market by acquiring a 100% equity stake in Union Bank Limited, United Kingdom, promising a future expansion like the Big Boys in the industry (Tier 1 banks). Proshare’s fit-for-purpose tier classification of banks ranked Fidelity Bank as a top tier 2 bank in 2022 based on its diversified asset portfolio, rapid technology integration, asset quality, efficiency, and profitability. Agusto & Co. affirmed the bank’s adequate capitalisation, low level of impaired credits and strong profitability with an ‘’A’’ rating and stable outlook. 

The bank has shown a strong commitment to sustainability initiatives, with the vision to become the country's number one sustainable bank. Environmental and social risk assessment procedures are integral to the Bank’s credit analysis process, and every business-related credit is screened against a set of environmental and social risk criteria. Apart from the bank’s strong presence in funding small and medium-scale enterprises, the bank has created initiatives to boost financial literacy and educational programs. 

The prevailing macroeconomic conditions have slightly threatened Nigerian banks’ position with the increased default, interest rate, and foreign exchange risk. Given their foreign asset holdings, the foreign exchange risk was initially a positive earnings stimulus for banks. However, the regulator's sanctions and expected exchange rate reverse have increased risk. Fidelity Bank fell under the category of banks with exposures exceeding the single obligor limit (20% shareholder’s fund). However, the exposure is relatively small when compared to tier 1 banks. 

A Peek Under Fidelity’s Financial Bonnet

In two decades, Fidelity Bank has sweat its assets to grow gross earnings to N337.05bn in FY 2022, with an average annual growth rate of 30.3%. The group has diversified its gross earnings, averaging 16% from non-interest income and 84% from interest income. The consistent rise in digital income and foreign exchange gains appears to have supported the continuous rise in the lender’s non-interest income, providing a buffer for rising operating costs. The post-COVID inflationary environment has made most Nigerian banks' cost-to-income ratio (CIR) rise above 50%, putting pressure on profitability. Nevertheless, Fidelity Bank’s profitability has seen a rise as profit before tax (PBT) grew by +148% from N21.63bn in FY 2012 to N53.68bn in FY 2022. The bank has large low-cost deposits with a distribution of 60% demand deposits, 23.20% savings deposits and time deposits, thereby reducing the bank’s cost of funds and propping its operating margins. The company’s financial ratios have shown improvement over time, except for its cost-to-income ratio (CIR), which was affected by a sustained high inflationary environment (Nigeria’s headline inflation rose to 31.92% in February 2024).

A peep into the bank’s financial position showed that total assets grew from N914.40bn in FY 2012 to N3.99trn in FY 2022, driven by the +513% growth in loans and advances, +79% growth in investment securities, and +156% bump in cash between 2012 and 2022. The technological era has eased customer retention and attraction as Fidelity Bank could grow its customer deposits from N716.75bn in FY 2012 to N2.58trn in FY 2022. Given the bank’s asset size, the bank has a strong presence in the medium and small-scale enterprise space with a diversified loan portfolio and lesser risk. The bank has consistently had a loan-to-deposit ratio above the statutory requirement, reflecting its commitment to the core function.  The bank’s shareholder’s fund has grown steadily, rising from N161.45bn in FY 2012 to N433.33bn in FY 2022. The bank’s capital position has remained strong, staying above the regulatory requirement of 15% at 18.10% as of FY 2022. (see table 1 below). 

Table 1:

Share price: Ramping Up Market Value 

Fidelity Bank’s share price movement has shown intense volatility in an upward direction over the past years. The stock price has risen from N2.52k on January 04, 2010, to N10.00k on March 15, 2023, generating a YTD return of 297%. Analysts believe the bank’s share price underlines its earnings growth and financial performance as higher dividend yields and future earnings forecasts have triggered demand in the money lender’s shares. Over the last ten years, the bank’s share price has risen to a resistance (highest price) of N14.20k on March 05, 2024, and a support price (lowest price) of N0.76k on November 16, 2016. According to a Lagos-based stockbroker, ‘Fidelity Bank demonstrates the classical admonition to prospective investors of entering low and selling high. Over the last eight years, Fidelity’s stock price has risen by 44.19% on a compound annual basis; very few stocks could prove a better inflation hedge’ (see chart 1 below). 

Chart 1:

Tier 2 peer: Leading and Leaving the Pack

The financial services sector has been a major growth driver for the Nigerian economy in the last few years. Banks have shown sustained assets and profit growth. Tier 2 banks have used monetary tightening and naira depreciation to grow their non-interest and interest income to cushion their rising operating costs. Fidelity Bank briefly fell into this category and saw the highest gross earnings of N337.10bn and profit before tax of N53.68bn in FY 2022. The bank’s higher interest income relative to interest expense led to a net interest margin of 7.70% in FY 2022, ahead of other similar banks. Regarding its financial position, the bank had the highest total assets at N3.99trn. The bank’s relatively low-risk asset exposure kept non-performing loans (NPLs) at 2.90%, the second lowest in the Tier 2 category ahead of Wema Bank. Although the group has struggled with curtailing operating costs with CIR above 50%, Fidelity earned the second lowest CIR among Tier 2 banks at 59.00%, slightly behind FCMB at 53.90% in FY 2022.

In 9M 2023, Fidelity Bank (which Proshare analysts estimate will rise to full Tier 1 status in its next Tier 1 Banking Sector Report review and based on Proshare’s Banking Strength Index (PBSI)) led second-tier banks in gross earnings, profitability, total assets, customer deposits, and loans and advances. However, its non-performing loan ratio (NPLR) rose to 3.54% after Wema Bank's 2.50%, while its cost-to-income ratio (CIR) settled at 49.86%, which was an improvement from the previous year’s ratio (see chart 2 below).  

Chart 2:

Closing Thoughts- Coping with Tomorrow’s Yesterday

Fidelity Bank showed resilience yesterday, but it must show foresight for tomorrow. The banks that will thrive in the evolving economic environment are those that will achieve the following:

• Low CIR
• Low NPLR
• Low deposit costs
• High off-balance sheet earnings
• High-tech adoption and adaptation
• High digital-banking-inspired operating margins
• High customer sensitivity and adaptability
• High level of agility
• High CAR: adequate capital will be a linchpin in the competitive market of tomorrow
• Flat operating structure: hierarchical structures will fizzle

In the natural game of corporate survival and sustainability, a successful bank cannot afford to play major in a minor league.  As one analyst said, ‘To ensure that you keep your doors open and evolve to meet customers’ expectations (and not just their needs), you must not respond to but create the future; that is the only way you can predict it’. 

She said, ‘You have got to choose smart money, and it is not locked somewhere in the books of banking and finance experts. It is on the streets; it is in the minds of tomorrow’s employees, the hearts of tomorrow's entrepreneurs, the desires of tomorrow’s customers, and the imagination of today’s business intelligence officers. It is on a bridge that links market intelligence to corporate actions.’ 

Fidelity Bank, over the years, has shown corporate resilience, which would need to be strengthened against the background of the recent recapitalisation requirements instructed by the CBN in a circular released on March 28, 2024, requiring deposit money lenders to recapitalise to N200bn in share capital for a national license and N500bn for an international operational license. With its recent acquisition of Union Bank UK, Fidelity will need to review its inorganic growth plans and decide whether it would restrict itself to a national bank license or take on an international license. The choice is difficult as it has implications for earnings, earnings per share, dividends per share, and return on equity (ROE), among other considerations.

Whatever decisions are made will be reflected in Proshare’s forthcoming Tier 1 Banking Sector Report. The report will look at the bank's past performance and its most recent 2023 audited financial report and explain the implications of the bank’s recapitalisation decisions on its corporate future, including customer service delivery outcomes, investor expectations, and board and management strategic growth opportunities and hurdles. The report will recognise that over the next twenty-four months, Fidelity Bank, like other financial lenders, must embark on a unique evolutionary journey involving guile, guts, and grit. 

Editors Note

The Fidelity Bank analysis was written three weeks ago and would be subsequently updated by a fresh report reflecting more recent accounts available including the bank's Q1 2024 report. This report was anointed with an update on the CBN’s recapitalisation rules and the likelihood that this would have an impact on Fidelity Bank’s tier 1 bank status to be reviewed in Proshare’s forthcoming Tier 1 Banking Sector Report.

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