EUR 4.00 For Business Accounts Only

Initial View - Fidelity Bank Plc - Loan growth pulled the magic

• Fidelity bank kicked off the year on a good note with the bank posting EPS growth of 17.2% QoQ to N0.21, representing 23% of our FY 19 estimates. Despite moderation in NIR, growth in the quarter was supported by the duo impact of higher interest income and lower operating expense (-22.6% QoQ to N16.7 billion) largely due to lower AMCON charge book during the quarter relative the Q4 18.
• Specifically, interest income rose 16.2% QoQ to N38.7 billion on the back of sizable growth in both interest income on loans (+9% QoQ to N27.4 billion) – a fallout of increased loan book – and income on investment securities, both of which supported 100bps QoQ expansion in assets yield. Meanwhile, funding cost expanded 7bps QoQ with interest expense increasing at a modest pace of 4.7% QoQ to N22.9 billion, reflecting an increase in term deposits as well as higher borrowing cost. On balance, net interest income increased 38% QoQ to N15.8 billion with net interest margin expanding 111bps QoQ.
• Elsewhere, NIR (-46% QoQ to N8.6 billion) printed lower as expected due to a high base in Q4 18 when the bank booked material gains on FX revaluation of N7.5 billion. That said, the bank still recorded N2.3 billion in FX gains (largely trading income).
• Loan book on the rise. Once again, loan book continued to rise, expanding by 14% YTD to N966 billion. We link this increase to the bank’s continued on-lending activities through BOI, CBN and NEXIM. As a matter of fact, the bank recently got a $75 million on-lending facility from Afrexim Egypt to boost its on-lending borrowings. That said, we will be seeking further clarity from management on other drivers of loan growth as well as sectorial exposures. Investment securities on the other hand, printed 3% lower YTD. Elsewhere, customer deposits printed 4% YTD higher with CASA moderating 180 bps QoQ to 79.8%.
• Modest growth in earnings. In our stock update published earlier this month (See report: ), we outlined our expectation for a modest growth in earnings over 2019 largely from an expansion in loan book as well as moderation in funding cost. Particularly, our expectation for higher loan growth was driven my management’s aggressive stance on growing its balance sheet together with its retail drive. Also, given an improved deposit mix, we outlined our expectation for moderation in interest expense over the year. That said, together with a moderation in NIR, we forecasted an increase of 11% YoY to N0.88 over 2019.
• With the performance across income lines broadly in line with our guidance, we have left our model unchanged and maintain our FVE of N2.92/share with a BUY rating. Fidelity trades at a forward P/B of 0.40x, a premium to its current P/B and FCMB forward P/B of 0.30x and 0.28x respectively. The higher P/B relative to FCMB is quite justified based on its higher ROE.