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Initial View- Fidelity Bank FY 2020 - Impairment spike and lower NIR swings earnings negative

Impairment spike and lower NIR swings earnings negative

• Fidelity Bank Plc published its unaudited results, which showed EPS decline of 1.4% YoY to N0.97/share, in line with our estimate. Key drivers of the result were decline in Non-interest revenue (NIR) and higher provisioning (compared to a net write back in the prior period), both of which masked the sharp decline in interest expense.
• To start with, the 14% YoY decline in NIR largely reflected a 31% YoY fall in net fee and commission income, outweighing gains from trading financial instruments (+69% YoY). To buttress, fee income fell by 21% YoY to N13.7 billion mirroring moderations in credit related fees (-15% YoY), commission on traveller’s cheques (-22% YoY), amongst other line items. Furthermore, the 17% rise in fee and commission expense contributed to the decline in net fee income. Elsewhere, an impairment charge of N15.7 billion was recorded compared to a net write back of N5.3 billion in 2019.
• Despite a 3.6% YoY decline in interest income to N175.5 billion – a fallout of lower interest income on loans (-6% YoY) as well as lower interest income on investment securities (-11% YoY), Net interest income still printed higher (+25.3% YoY to N104 billion), thanks to the sharp decline in interest expense (-27.8% YoY). We think the moderation echoes the reduction in interest rate on savings deposit, implemented in September 2020 as well as the lower rate environment. On balance, Net interest margin declined by 10bps, mirroring a faster decline in asset yields (-290bps). Overall, the decline in NIR and higher provisioning neutered the increase in net interest income.
• Further down the line, operating expenses over the year rose slightly by 0.9% YoY to N82.8 billion. However, cost to income ratio declined to 64.3% (FY 19: 74.3%), due to a faster rise in operating income (+15.2% YoY to N128.7 billion).
• On the Quarterly numbers, we noted a dour performance reflective of higher operating expenses (+12% QoQ to N18.98 billion) and higher provisioning (+47% QoQ). These muted the increase in Net interest income (+8.8% QoQ) – a fallout of a 28% decline in interest expense – and higher NIR (+22.9% QoQ).  Overall, PBT came in lower by 5.6% QoQ while PAT recorded a steeper moderation of 16.2% QoQ owing higher tax effective rate of 13.9% over the quarter.
• While we await audited results and management’s presentation, we note the key risks to consider over 2021 include the twin impact of lower yield environment. Precisely, on the one hand, this is likely to have an adverse impact on interest income, while simultaneously providing respite to funding cost. 
• We will give update to our forecasts for 2021 upon release of the audited result. Our last communicated FVE of N3.18, translates to a NEUTRAL recommendation on our rating scale. FIDELITY trades at a current P/B of 0.29x, a premium to its 5-year historical average of 0.26x