The Tribune

• Merchant services to help drive increase

• Net income near $22m if ‘one-offs’ stripped

• CEO: ‘Core deposits’ increased by $20m

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fidelity Bank (Bahamas) is targeting $25m in net profits for 2023 despite failing to achieve the same goal last year, its top executive revealed yesterday.

Gowon Bowe, the BISX-listed lender’s chief executive, told Tribune Business he expected the bank’s buoyant merchant services business to drive increased returns for the full year after it was largely responsible for producing a 65 percent increase in fee and commission income to $6.145m in 2022.

And, speaking after Fidelity Bank (Bahamas) unveiled its unaudited financials for the year to end-December 2022, he added that the $20.116m net income was likely to be adjusted upwards as a result of lower loan loss provisions than those shown yesterday.

Explaining that the institution had taken a “conservative” approach to provisioning as it has yet to complete the associated modelling, Mr Bowe said this - combined with the stripping out of some $1.75m in one-off merchant acquisition and marketing costs - would take Fidelity Bank (Bahamas) close to being on par with 2022’s $22.17m profits.

Asked about the bank’s bottom line ambitions for 2023, he told this newspaper: “We are projecting that $25m again. We feel we are really in the $22m range, and with the growth that we have seen on the fees and commissions with merchant services, we can increase profitability.

“We’ve set for 2023, in our January Board meeting, a target profitability of $25m. They tease me that I may have been prophetic, but just a year in advance.” Fidelity Bank (Bahamas) had forecast that it would achieve a $25m ‘bottom line’ in 2022, although it subsequently revised these projections to between $22.5m to $23m towards the end of 2022.

The profits shown in the unaudited financials came in under the revised targets, but Mr Bowe said there was no cause for alarm. “We have two elements that are still being considered,” he explained, noting that they are not audited financial statements. “The expected loss on the credit portfolio. With the improvement seen in credit quality over the last year, and the reduction in the loan portfolio, we expect there to be some release from the provisions.”

The Fidelity chief did not quantify this sum, although the unaudited financials showed a 14 percent or $843,000 year-over-year increase in loan loss provisions to $6.844m, but added: “We have taken what I call the conservative view for the unaudited submissions. The specific provisions we know are correct. The model, which requires inputs and judgment, there’s going to be a bit more work to complete that, which should be done by the end of the month.

“We’re very confident that the profitability will only go up.” Mr Bowe, though, conceded that 2022 did not finish with the anticipated increase in new loan approvals ahead of the Christmas shopping season. “The contributing factor was that fourth quarter loan book growth was not what we had projected,” he explained.

“We saw positive signs in October and November, but persons did not continue that through December. December was a relatively flat month in terms of credit growth. We lost a bit of the quarter’s momentum.” Fidelity Bank (Bahamas), in common with many of its commercial bank rivals, struggled to grow its loan book again in 2022.

The unaudited financial statements showed the loan portfolio shrunk by 7.4 percent, or more than $29m, in 2022 as it fell from $401.585m at year-end 2021 to $372.034m. “When we look at the Central Bank statistics, lending for the year continued to contract. We’re not immune to that. The industry is experiencing where repayments are exceeding new credit that is being extended,” Mr Bowe explained.

The $2.4m year-over-year increase in fee and commission income drove the rise in Fidelity Bank (Bahamas) operating income for 2022 to $59.27m compared to $57.338m the year before. A decline in interest income, and reduced interest expenses, effectively cancelled each other out to leave net interest income almost perfectly flat against 2021 comparatives at $52.941m.

The lender’s bottom line was narrowed due to a near-$4m jump in operating expenses, which increased by 11.2 percent from $35.174m to $39.128m. General and administrative expenses were the main culprit, growing by 24.2 percent or almost $3.3m to $16.891m as opposed to $13.6m in 2021. There was also a $700,000 rise in staff salaries and benefits.

Explaining the general and administrative expenses hike, Mr Bowe said: “We have one-off costs with the merchant acquiring business. If you look at it in terms of the net impact, fee and commission income almost doubled, which is attributed to merchant acquisition efforts.”

Pointing out that Fidelity Bank (Bahamas) had decided to take these costs upfront, rather than spread them out or amortise them over several years, he said merchant acquisition costs were among “two drivers” of the general and administrative expenses rise.

“The merchant acquisition costs, we believe $1m are nor recurring when we look at where we are,” Mr Bowe told Tribune Business. “And with the marketing and public relations, there was a $750,000 increase on that one. We are focusing attention on data mining the public relations effort by saying which areas were more effective, and which are more traditional and can be reduced. We’ve seen the PR campaign in 2022 be very fruitful in terms of brand recognition.

“When we strip those out, before any adjustments to the provisioning modelling, we will be on par with the prior year. If you take the lower profit amount with a grain of salt, if you will, there’s opportunity. If you see the fees and commissions income, we’re on the right track.”

While Fidelity Bank (Bahamas) saw its total deposit base shrink by almost $123m year-over-year in 2022, suffering a near 15 percent decline to $656.88m, Mr Bowe said this was no cause for alarm as “core customer” deposits actually expanded by $20m.

“We don’t seem to be able to effectively shed deposits,” he added. “Despite seeing deposits from clients decline, that’s really institutional client money kept on demand. That moves up and down. Our core deposits went up by $20m, and institutional investors went down by $120m. That’s not money we consider to be core deposit money. That support is still intact.”

Noting that Fidelity Bank (Bahamas) produced a return on equity of 22 percent last year, Mr Bowe said it was vital that this remain above 20 percent in most years to build a buffer against shocks from natural disasters and pandemics.

“From a regulatory standpoint there’s justifiable concerns when they see the return on equity dropping below 15 percent because any year can be like a COVID year or a significant natural disaster that could have an impact on provisions,” he explained.

“Sometimes there’s not appreciation by the tax authorities and persons who are not shareholders that you do need that level of return because there are years when there is a confluence of losses. It’s an industry that is taking significant risk and needs to stay stable. We are a safe haven for deposits. Depositors don’t want you taking risks that put their money in jeopardy.”