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Equity Report - Fidelity Bank Plc - Love at second sight

• Following engagement with management and our updated views on the bank, we have made some adjustment to our expectation on Fidelity with net-impact lowering our FVE to N82 (previously N3.08). Irrespective of the downward review to valuation, we still like Fidelity, and remains our preferred pick in the Tier 2 space (after Stanbic) on the back of its strong fundamentals and thus, retain our BUY rating on the stock. Fidelity trades at a FY 18E price-to-book of 0.39x, a premium to Diamond (0.14x) and FCMB (0.18x), which we think is justified based on its first-rate ROAE (10.7%) in FY 18E relative to Diamond (2.1%) and FCMB (6.0%). At current price, our expected dividend of N0.15 over FY 18E translates to a dividend yield of ~8%.
• In terms of downward revision, we have adjusted our funding cost expectation over FY 19F – FY 21F mirroring a lower CASA ratio over the period and higher cost on the refinanced Eurobond. On the positives, we now expect loan book to grow by 6% YoY (previously 3%) following a YTD expansion of 3.5% and look forward to a better asset quality over 2018 with NPL ratio revised lower to 6.1% (previously 6.5%). Furthermore, we have lowered our forecast cost of risk by 30bps to 1.0%, which necessitated a moderation in loan loss provision by 28% YoY to N2 billion (previously N10.3 billion) in FY 18.
• On the income line, following the surprise jump in fee and credit income over H1 18, we have adjusted our forecast for Non-Interest-Revenue (NIR) higher to N5 billion (previously N26.4 billion) which more than offset the downward adjustment of our Net Interest Margin to N70 billion (previously N77 billion).
• Net impact of our adjustment translates to an EPS of N76 (previously N0.72) in FY 2018. At the end of FY 18, we see ROAE touching double-digit (FY 18E: 10.7%, FY 17A: 9.7%) for the first time since FY 12. That said, following upward review to our cost of funds beyond 2018, we lower our earnings forecast over FY 19F and FY 20F by 29% and 19% respectively.