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Initial View - Fidelity H1 2020 - Non-interest Revenue comes to the rescue

• Fidelity bank released its H1 2020 result showing a 21.9% YoY expansion in PBT and a 33% YoY growth in PAT. Supporting the growth in earnings were lower interest expense and significant growth in Non-interest revenue. While PBT and PAT came in at 47% and 48% of our full year estimates, Non- Interest Revenue and loan loss provision came in significantly higher than we had expected.
• Over H1 20, Fidelity recorded a marginal growth of 2.1% YoY in interest income following higher interest income on investment securities and interest on loan to customers. Meanwhile, the lower interest rate environment was evidenced in Fidelity’s interest expense on deposits (precisely term and current account deposits) which declined by 19.7% YoY. This drove net interest income higher by 31% YoY to N48.3 billion. Net interest Margin expanded moderately by 60 bps YoY to 6.4% following a faster decline in cost of fund (-230 bps YoY to 4.3%).
• Elsewhere, Non-interest revenue (NIR) rose significantly by 17.8% mirroring growth in FX gains (+152% YoY to N7.4 billion) and gains on financial assets. These more than outweighed declines in fee income which fell sharply by 37% YoY. Meanwhile, FX gains (combination of FX trading gains and FX revaluation gain) seem to be tracking above full year expectation. Precisely, we had estimated circa N6 billions of FX revaluation gain over FY 2020 given Fidelity’s net long FCY position of $300 million. Hence, we think the additional FX gains is linked to higher FX trading gains. Nonetheless, we will seek clarity on this from management during the conference call.
• Notably, NPL ratio rose to 4.8% over H1 20 ( FY 19: 3.3%), reflecting the impact of  covid-19 on several sectors as impairment charge rose to N7.8 billion compared to a write back of N621 million in H1 19. This translated to a higher cost of risk of 1.3% compared to -0.1% in H1 2019.
• Contrary to the full year numbers, quarterly numbers showed a poor performance as PBT and PAT declined by 18.3% YoY and 7.1% YoY respectively.
• Despite expansion in NIR (+120.6% QoQ); lower Net Interest Income, higher loan loss provisioning (+172.8% QoQ to N5.7 billion) and higher operating expenses drove overall earnings lower. Net interest income fell by 3.6% QoQ largely driven by a rise in interest expense by 3.4% QoQ – fallout of higher borrowing cost. Elsewhere, expansion in operating expense largely reflected implementation of IFRIC 21  – levies on AMCON levy. This meant Fidelity booked 100% of its AMCON levy in H1 2020 rather than amortizing it over a 12 month period as was usually done before.
• Meanwhile, there was a slight improvement in Capital adequacy ratio (CAR), which printed at 18.8% (FY 19: 18.3%), above regulatory limit of 15% following capitalization of H1 20 profit. Our last communicated FVE of N2.90, translates to a BUY recommendation on our rating scale. FIDELITY trades at a current P/B of 0.22x.

We will be updating our estimates after meeting with management on Tuesday.