By Omoh Gabriel, Business Editor
PRIOR to 2006 review year, Fidelity Bank adopted a largely systematic but conservative growth strategy which saw it achieve steady but incremental growth pattern over the years.
In approaching its business, the Bank also exhibited high level of ethics and professionalism. Attention was paid to content and brand integrity.
However, in 2004, the Bank began to open up gradually on its approach to growth as if it had a premonition of directives of Central Bank of Nigeria that was to come later on consolidation.
During the 2003/2004 period, it acquired substantial interests in the capital market and insurance firms not only as a way of living up to its universal banking license but also to rev up internal growth through services integration.
Hence, when the directive came in the middle of the year, it was positioned to play a leading role in the exercise. After a series of negotiations and agreements, it eventually merged its operations with those of FSB International Bank and Manny Bank in an exercise described by industry watchers as fusion of banks with so many similarities. None of them operated as a big bank within the context of Nigerian banking system. The legacy banks were a little conservative in asset creation but professional and reported reasonably healthy operational statistics just prior to consolidation.
Accordingly, the new Fidelity Bank emerged without extra-ordinarily high consolidation costs. In fact, the process was managed in such a way that shareholders of Fidelity Bank did not have to immediately pay for goodwill. None of the merged banks was burdened with negative shareholders’ such that ultimately the merger process resulted in a capital reserve of about N2.6 billion instead of payment of goodwill.
In order to ensure that post-merger Fidelity Bank continues operating in the best traditions of professionalism, probity, integrity and value creation, it instituted a Corporate Governance structure executed essentially through three organs – Board of Directors, Board/Shareholders Committees and Management Committees.
The framework is designed to be consistent with Central Bank of Nigeria’s code of corporate governance for banks after consolidation. The board is composed of 14 directors with four executive directors and 10 non-executive directors, out of which two are independent directors representing no shareholder interests.
There are four Board Committees, one shareholders’ Audit Committee and five Management Committees.
One area the Bank slacked in 2006 is in the sphere of corporate social responsibility. Prior to consolidation, it demonstrated tradition of active support to social causes and spent about N16 million in this area. Such assistance cut across religious organisations, professional groups and health. But in 2006, it was only able to do about N1.8 million, perhaps due to pre-occupation with consolidation and integration matters.
But it continued with the strategic branch expansion plan launched by the legacy bank in 2003/2004 financial year. Recall that as part of a new desire to open up then, it incorporated branch network strategy into an ambitious five-year growth plan such that by the close of that period, it added five new branches to bring the total to 26. This went up to 36 in 2005 and 83 presently. Aware of the raging competition to open branches among banks in the post-consolidation era, the Bank intends to sustain this aggressive expansion strategy to contend for a fair share of the market.
Fidelity Bank also appreciates the place of quality human capital in the post-consolidation era and this accords with a culture already established by the three banks that merged. Legacy Fidelity Bank particularly maintained well above average training and motivational packages that not only ensured high staff productivity but also ensured low personnel turnover. Following consolidation, total staff strength rose from 395 to 1,159 just as staff dislocation was minimal for obvious reasons. This made for a relatively smooth integration of manpower.
Integration of Information Technology infrastructure was also seamless due to a number of similarities that existed and the heavy investment already made. For instance, total investments already made in computers and equipment rose from N667 million in 2005 to N3.18 billion. Of the inter figure, N2.35 billion was inherited from the other two legacy banks while N169 million accounted for new purchases made during the year to harmonise the facilities.
This has provided the solid platform to render seamless services to customers across the entire network and also the impetus for growing confidence in its ability to satisfy customers. In 2006, all basic indices of growth responded positively in the desired direction. Deposit liabilities increased more than tripple fold from N20.6 billion to N78.6 billion just as total assets rose from N35 billion to N120 billion.
EARNINGS AND PROFITABILITY PERFORMANCE
In our previous review, it was consistently observed that growth in several operational indicators followed a stable pattern. In no other performance area was this phenomenon more manifest than in the area of earnings and profitability. Consider that in 2002, 2003, 2004 and 2005 financial years, the Bank grossed N3.2 billion, N4.4 billion, N5.5 billion and N6.2 billion respectively in earnings. Net profits also followed a similar pattern. Following the business combination that was consummated in the 2006 financial year, gross earning increased from N6.2 billion to N11.6 billion of which interest and discount income accounted for about 66 per cent. Although earnings efficiency declined from 19 per cent to 15 per cent, the more interesting result here is that gross interest margin increased from 47 per cent to 56 per cent, a suggestion perhaps that the new Fidelity Bank may be enjoying the benefit of scale of economies in managing the pricing of key asset and liability items. Hence cost of funds was not allowed to match the growth in interest earnings. Particularly delightful was about N377 million recovered as bad debts already written off earlier.
Equally, the Bank’s efforts to rein in costs in the face of larger operational base proved largely successful. While operating costs increased by 109 per cent, operating income rose by 118 per cent. In fact, cost management efficiency increased from our measure of 25 per cent to 31 per cent. Hence Profit After Tax witnessed more than 155 per cent increase from the 2005 figure of N1.24 billion to N3.16 billion which translates to increase in earnings per share from 14 kobo to 19 kobo. This is despite the increase in number of shares from 8.55 million to 16.46 million. This shows that the Bank was definitely more productive to shareholders in 2006 notwithstanding that return on average shareholders’ fund remained virtually flat. With such an impressive result, shareholders received cash dividend of 11 kobo per share as against nothing in 2005.
CAPITAL BASE, ADEQUACY AND SAFETY
Because management has been a little more cautious and conservative in orientation, the issue of capital, risk expansion and safety has always been considered in an integrated manner in the Bank. Consider a situation where the legacy Fidelity Bank maintained an approximate estimate of risk weighted asset ratio of 25 per cent for three consecutive years of 2003, 2003 and 2004.
This suggests that the decision to increase risk asset was always matched with accretion in shareholders’ fund made possible by a largely conservative dividend policy.
During the 2006 financial year, the Bank utilised the opportunity of the regulation-induced reforms to sustain this tradition of maintaining high level of capital adequacy and safety margin in operations by even surpassing the preceding years’ figures. In fact, estimate of the critical ratio increased further to 27 per cent in 2005 and 30 per cent in 2006. The later figures show that rate of increases in capital even outstripped risk asset expansion.
Earlier in the consolidation period, Fidelity Bank did a private placement and public offer of its shares which combined to bring it close to N20.0 billion shareholders’ fund. This was actually on target according to stage two of initial recapitalisation plans to achieve 80 per cent of the new prescribed minimum of N25 billion. The merger with FSB International and Manny Banks accounted for the balance that closed the figure at N25.6 billion by June 30, 2006 which translated to 30 per cent of estimated risk weighted assets.
By all standards, this figure is adequate for the level of its business exposure with significant leverage for prudent expansion. But whether it is enough to compete for long-run leadership in the emerging environment is another matter altogether.
QUALITY ISSUES
Perhaps one factor that influenced the Bank’s cautious approach to risk asset expansion is rooted in history. Before 2003, quality of risk assets remained at levels that could not be classified as better than average. Specifically in 2002, non-performing loans ratio was 22 per cent, suggesting that in an average of some four loan facilities, one suffered differing levels of delinquency. This systematically improved to 19.4 per cent in 2003, 18.3 per cent in 2004 and eventually 11.6 per cent in 2005 reflecting success of measures undertaken to clean up the risk management process. There was, however, a slight reversal in 2006 as the ratio went up again to 16.7 per cent following integration of portfolios of the three legacy banks.
Though this is still above average, it had some adverse impact on overall portfolio quality. But a further analysis of the figures shows that this arose from old facilities hence the positive trend may surface with the 2007 results.
On the other hand, liquidity levels remain traditionally high with the Bank maintaining reasonably high capacity to meet obligations to customers in a short time. The Bank knew that this is required to sustain the kind of confidence that enabled deposit liabilities to move from N20.57 billion to N78.65 billion. Accordingly, the proportion of entire portfolio invested in liquid assets grew from 51 per cent to 60 per cent. This is considerably high and Analysts believe it was more than comfortable level to meet the demands of customers and regulatory authorities without putting unnecessary stress on the Bank.
On balance therefore, balance sheet quality remained at slightly above-average level capable of sustaining confidence of counter-parties and stable returns into the future.