EUR 4.00 For Business Accounts Only

Initial View: Fidelity Bank Plc H1 2018 - Earnings breaking limits

• In its half-year 2018 audited numbers, Fidelity Bank Plc posted a solid performance with earnings printing in line with our estimate. The result showed that Profit Before Tax (PBT) expanded 27% YoY to N1 billion with after tax profit of N11.8 billion higher by 31% YoY – EPS of N0.41 (H1 17: N0.31) – following support from higher Non-Interest Revenue (NIR) and substantial decline in loan loss provision, both of which more than outweighed the 140bps YoY contraction in Net Interest Margin. Accordingly, estimated ROAE came in robust at 13.0% (H1 17: 9.5%).
• Fee income takes the shine. Fidelity recorded a 55% increase in NIR (N4 billion) over the period stemming from Fee Income and Gains from financial instruments. On fee income, management stated that 40% of customers enrolled on its mobile/internet banking products and over 80% of total transactions were done on digital platforms. Also, credit related fees came in strong at N4.3 billion (+652% YoY). We suspect this increase is related to the expansion in Fidelity’s loan book (+3.5% YTD), but we will seek clarity from management over the sudden jump.
• Moderation in cost of risk. Over H1 18, Fidelity’s annualized cost of risk contracted to 0.7% (H117: 1.5%) as the bank recorded a lower impairment charge of N6 billion (-46% YoY) mirroring a stage 3 write back of N3.3 billion. In terms of asset quality, NPL ratio tracked lower to 6.1% (H1 17: 6.4%). Coverage ratio (incl. regulatory reserve stood at 112.7% (FY 17: 109.4%).
• Higher funding cost outweighs interest earnings. Interest expense rose 10% YoY on the back of a jump in borrowing cost (+64% YoY to N2 billion), a development we attribute to the higher rates on the recently issued Eurobond. Recall, over Q4 17, management refinanced the maturing 6.875% $300 million Eurobond with the issuance of a 10.5% $400 million. Also, during the period under review, the NIFEX rate almost reached a convergence with the NAFEX, thus culminating in currency translation impact on interest paid. Higher growth in interest expense coupled with a flat interest income drove Net Interest Income (NII) lower by 11% YoY to N30.1 billion.
• Interest earning assets on the rise. In contrast to most banks, Fidelity’s loan book expanded 3.5% YTD to N795 billion with investment securities increasing 21% YTD to N250 billion. On balance, total interest earning assets expanded 13% to N2 trillion. Deposit grew by 20% YTD to N928 billion with CASA as a share of total deposit moderating to 73.8% (FY 17: 77%).
• Our Take. Fidelity Bank’s result was in line with our expectation and largely in sync with our views for FY 18E. We will be seeking clarity from management on the growth in credit related fees and flat growth in interest income despite sizable growth in investment securities and loan book. In addition, we will seek to find out the reason behind the second consecutive decline in its CASA ratio. Aside these, we believe the bank is in line to match or outperform our FY 18E EPS of N72. To add, we expect ROAE to end in double digits for the first time since FY 12.
• The stock is trading at a P/B of 0.27x, a premium to peer average of 0.24x, a seemingly justified premium in the light of Fidelity’s best-in-class ROAE relative to the rest of its peers. Our last communicated FVE on Fidelity Bank is N08 which translates to a BUY rating on the stock.
• We will revisit our numbers after further analysis and discussion with management.
• The bank will be holding a teleconference call on Friday, September 28, 2018 at 3pm Lagos Time (3pm London/ 4pm Johannesburg/ 10am New York) with its senior management. Click for call details.