EUR 4.00 For Business Accounts Only

Equity Report - Fidelity Bank Plc - Our preferred Tier 2 Bank

• Fidelity Bank posted its nine-month 2018 result which was impressive on the back of a 55% YoY decline in loan-loss provision which masked the weak non-interest revenue (NIR) and lower operating efficiency. The result came slightly above our expectation with 9M 18 EPS (N0.62) printing at 81% of our FY 18E EPS of N0.82. Relative to our expectation, the variance stemmed from a slower growth in funding cost as well as lower than expected loan-loss provisioning.
• Following discussion with management via its conference call on Tuesday, we have updated our model on the bank and made specific revisions to our estimate. Specifically, we made a downward adjustment to NIR informed by our expectation of lower growth on net fee income and net gains from financial instruments. We have also revised our funding cost lower to 7.2% (previously 7.4%) which should drive a 40bps expansion in FY 18E NIMs to 6.2%. Elsewhere, we have reviewed our loan growth forecast higher to 10% (previously: +6% YoY) given current run rate of 8% YTD. Consequently, asset yield should print slightly higher at 14.3% (Previously 14.2%). On asset quality, we have revised our Cost of Risk forecast for 2018 lower to 0.6% (previously 1.0%) which now informs loan-loss provision of N5.1 billion (previously: N8.2 billion).
• On balance, we are now more optimistic over our expectation for earnings growth. Net impact of our adjustment translates to an EPS of N0.82 (previously N0.76) in FY 2018 (FY 19E: N1.09). Over FY 2018, we expect ROAE to expand 108bps YoY to 10.8% and average 12.3% over the next four years. Post adjustments, our FVE for Fidelity increases to N2.92 (vs. N2.82 previously).  We maintain our BUY recommendation on the stock. Fidelity trades at a FY 18E P/B of 0.36x, a premium to Diamond (0.14x) and FCMB (0.18x), which we think is justified based on its first-rate ROAE (10.8%) 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 ~7%.