The Tribune

• Preference share payout to give $1.1m boost

• To get approval for new $50m bond framework

• Recovered $8.6m in COVID loan loss provisions

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A BISX-listed bank has an “ace in the hole” when it comes to hitting its $25m profits target for 2022, its top executive revealed yesterday.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that the planned May 2022 redemption of its remaining $20m preference shares will save two-thirds of the annual $1.1m in total interest it has to pay to holders of that debt.

As a result, with almost two-thirds of its 2022 financial year remaining following the redemption, around $733,000 in interest savings will drop straight to the commercial bank’s bottom line as it chases a near 13 percent year-over-year increase on last year’s $22.17m net income.

“We still believe we have an opportunity to grow the profit base by another 15 percent, so we are certainly targeting $25m and upwards,” Mr Bowe told this newspaper of Fidelity’s 2022 profit target. ‘We were originally targeting $15m for last year. Very early on we realised we were going to exceed that.”

Pegging Fidelity’s “stretch” profits target for 2022 at $26m, he added that the bank’s ambitions would receive a boost from the redemption of $20m in preference shares that have an interest coupon much higher than existing deposit rates.

“We were able to redeem some of our debt in 2021,” Mr Bowe explained. “We redeemed $4m of debt securities, preference shares. They were higher interest instruments than deposits from customers. The remaining $20m are up for redemption in May 2022, and we fully anticipate redeeming them without having to rollover at this time.”

Fidelity had some $378.254m in “cash on hand and with banks” at year-end December 2021, together with $68.048m in retained earnings on its books, giving it a sizeable war chest from much to return investors their principal when the issue reaches maturity.

“The redemption this year will save us on the interest expense that is costing us $1.1m in interest per year,” Mr Bowe told Tribune Business of the preference shares. “The target of $25m, we have, if you will, an ace in the hole, because we know we will save a large part of that - two-thirds of the $1.1m in interest expense - which will drop to the bottom line.”

And it is taking the precaution of obtaining Board and Central Bank approval for a new bond programme similar in size to the previous $50m should the bank need to raise additional capital in future.

Mr Bowe, explaining that there are no plans to immediately issue bonds to investors, but just put in place the mechanism necessary to do so, said: “We plan to roll-out a new bond programme so that we have approval if we do need to issue it and not wait until the need arises.

“We certainly don’t anticipate that need in 2022. We believe our customers, being as loyal to us as we are to them, we’re certainly seeing behavioural changes where they’re willing to lock in deposits for three to five years.”

Fidelity saw total customer deposits increase by 33.9 percent in 2021, rising from $574.997m at year-end 2020 to $769.755m some 12 months later. With this level of growth, Mr Bowe said the institution plans to finance any loan book growth with cheaper deposits as opposed to higher cost bond and preference share debt capital.

The BISX-listed bank faces the same challenge confronting all its rivals, namely a shrinking loan book (assets) as new qualified borrowers prove hard to find, coupled with rising deposits (liabilities) and cash on hand.

As a result, the near-tripling or 199.7 percent increase in Fidelity’s 2021 profits, which rose from $7.396m in COVID-hit 2020 to $22.17m, was exclusively driven by the dramatic slash in loan loss provisions. These fell almost $18m to $7m, as opposed to $24.968m the year before, more than compensating for reductions in gross and net interest income.

Mr Bowe acknowledged that the drop-off in the last two indicators was driven by the rise in non-performing loans, which meant that borrowers are paying no interest on those facilities. “We do believe, in terms of bringing those numbers back on stream, we’re going to have a much better opportunity to increase interest income,” he added.

“We’ve taken the position that we’re not doing marginal credit to maintain the loan portfolio. We’re prepared to work with our customer base, and customers who have been fully transparent we’re certainly going to support them and extend credit. Where persons have gone into default, and have yet to fully come back, we will not be taking marginal credit.

“It’s not very easy to grow the portfolio because quality borrowers have not come back to full viability.” However, Mr Bowe said much of the increase in the deposit base had come from rival institutions, and these funds were non-interest bearing and not costing Fidelity a cent.

Revealing that the bank is ahead of target in recovering much of its COVID provisioning, he added: “We had incremental provisioning in 2020 of $15m above normal levels. We’ve been able to recover and restructure $8.6m of it so far. I was expecting this would take three years, but we’ve done over 50 percent of it in the first year. 

“With the remaining $6.5m or so to move, we’re already monitoring $3m of it. It appears to be on target to recover two-thirds of it, and maybe in a shorter timeframe than expected. It’s a good indicator for the economy as it means employment in the private sector - hotels, construction, and more perennial employers are seeing employment come back by about two-thirds.”

Mr Bowe confirmed that projections of revived loan book growth had given Fidelity the confidence to make its 2022 profit forecast. And this growth will be aided by The Bahamas’ first-ever credit bureau, which he added is now “actually functional” and issuing reports on prospective borrowers to banks and other financial institutions.

While these will not heavily influence Fidelity’s lending decisions for at least another year or two, Mr Bowe explained that these reports would give banks greater confidence to extend credit to “marginal” customers and expand “the pool” of potential candidates knowing that their present status and histories will largely have been captured in these reports.