Analysis: Fidelity Bank’s FX Losses & Energy Loans Points To One Thing
Nairametrics| Last week, Fidelity Bank Plc released its financial statements for the period ended December 2016. While gross earnings increased from N146 billion to N152 billion, profit after tax declined from N13.9 billion to N9.7 billion. Earnings per share also declined from 48 kobo in 2015 to 34 kobo in 2016. The bank declared a dividend of 14 kobo per share.
Like every other bank in the country, impairments spiked massively. Impairment charge almost doubled from N5.7 billion in 2015 to N8.6 billion in 2015. Banks have had to make higher provisions for loan losses due to the tough economic climate, which has seen many businesses in the country struggle to meet payment schedules. However, unlike other banks in the country that made huge gains from FX revaluation, Fidelity Bank made a whooping N47 billion naira loss on debt issued and other borrowed funds. The bank also made an N8 billion naira loss in the same category in 2015. These losses are very likely due to loans given or taken in foreign currency by the bank. The depreciation of the naira against the dollar means the bank will need more naira to pay back such loans.
Of the banks total loan book of N743 billion as at December 2016, 37% or about N275 billion was allocated to power and oil and gas sectors. Both sectors have witnessed serious challenges. The power sector is experiencing mounting receivables across the entire chain, while the oil sector is witnessing a drop in crude oil prices. The December 2016 Financial Stability Report released by the CBN highlighted the risk banks – especially Tier 2 banks like Fidelity – faced with respect to loans to the power and oil and gas sectors.
The oil and gas sector accounted for the highest share of credit from the entire banking industry at 30.02%. The result of a stress test conducted by the CBN showed that a 20% default in oil and gas exposure would leave medium and small banks with Capital Adequacy Ratios (CARs) of 11.87% and 2.63% respectively. A 50% default would leave only the large banks with CARs of 10.17%. Tier 2 banks like Fidelity may have given smaller loans in terms of Naira, but had a higher percentage of loans allocated to the oil and gas sector.
The bank also had a minimum CAR ratio of 17.22%. Slightly above the 15% requirement for banks in its category. With its huge exposure to the energy sector and losses on FX transactions, the bank may have to raise capital within the year. Despite all this, the bank went ahead to pay dividends, possibly to ensure that its share price remain attractive for a possible capital raise. Nigerian companies are fond of this approach.
Fidelity Bank is yet to announce any immediate plans for a capital raise but we expect this to be done soon.