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Stock Report- Fidelity 9M 2020 - Lower interest expense saves the day

• Yesterday, Fidelity bank released its 9M 2020 unaudited results showing a 3.6% YoY expansion in PBT. Further support from lower taxes (-38.8% YoY) drove a further expansion in PAT by 7.1% YoY to N20.4 billion. Though the bank recorded significant expansions in loan loss provisioning, higher operating expenses as well as lower interest income, the moderation in interest expense supported growth in PBT. Relative to our estimates, PBT and PAT came in higher than we had expected, precisely at 86% and 89% of our FY forecast, reflecting lower than anticipated interest expense.
• That said, save our adjustments to interest expense, we have left other line items unchanged. Precisely, we revised our interest expense lower for FY 2020 by 13% to N75.2 billion (previously N80.5 billion) to better reflect the lower interest rate environment. As a result, we expect a slower decline in Profit After Tax by 1.4% YoY to N28 billion in FY 2020. This adjustment takes our FVE to N3.18 (Previously: N2.9) which translates to a BUY rating on the stock based on the last closing price of N2.44 with an upside of 30.4%. FIDELITY trades at a current P/B of 0.84x with an ROAE of 11%.
• Over 9M 20, Fidelity bank recorded a decline of 2.0% YoY in interest income following lower interest income on loan to customers (-1.8% YoY) as well as investment securities (-10.7% YoY). Meanwhile, we noted a significant decline in interest expense on deposits (-25.2% YoY) which we believe reflects the lower interest rate environment. For context, interest expense on term and current account deposits declined by 39% YoY and 20% YoY respectively, outweighing growth in interest expense on savings deposit (+14% YoY). Albeit, CASA mix declined relative to the prior year, printing at 76.7% in 9M 2020 (vs 9M 19: 78.8%). Overall, the fall in interest expense resulted in a growth in Net interest income by 28.8% YoY to N75 billion. Net interest Margin expanded moderately by 30 bps YoY to 6.3% following a faster decline in cost of fund (-270 bps YoY to 4.0%).
• Elsewhere, Non-interest revenue (NIR) declined by 5.9% YoY reflecting declines in fee income by -25% YoY to N14.5 billion, offsetting FX gains (+187% YoY to N7.4 billion) and gains on financial assets. While operating expenses increased by 5.8% YoY to N63.8bn, operating income rose at a faster pace by 19.1% YoY to N96.2 bn, translating to a 540bps decline in cost to income ratio of 66.3%.
• Notably, NPL ratio rose to 4.7% over 9M 2020 ( FY 19: 3.3%), reflecting the impact of  covid-19 on several sectors as impairment charge rose to N11 billion compared to a write back of N138 million in 9M 2019. Consequently, cost of risk rose to 1.2% relative to 0% in 9M 2019. Meanwhile, Capital adequacy ratio (CAR) declined by 10bps to 18.2% in 9M 2020 relative to FY 19: 18.3%, above regulatory limit of 15%.
• On the quarterly numbers, we saw better performance in PBT and PAT which grew by 74.5% QoQ and 67.2% QoQ respectively. The impressive performance in PBT was driven by a significant drop in operating expenses (-32.8% QoQ) as well as lower loan loss provisioning (-44.3% QoQ). To emphasize, the decline in operating expenses reflects the recognition of full-year AMCON charge in H1 2020 in line with the requirements of IFRIC 21 Levies.
• In line with the foregoing, we revised our interest expense lower for FY 2020 by 13% to N75.2 billion (previously N80.5 billion) to better reflect the lower interest rate environment. We now expect a slower decline in Profit After Tax by 1.4% YoY to N28 billion (previously: -19% YoY) in FY 2020. Our FVE of N3.18 (Previously: N2.9) translates to a BUY rating on the stock based on the last closing price of N2.44 with an upside of 30.4%. FIDELITY trades at a current P/B of 0.83x with an ROAE of 11%.
•  Fidelity Bank Management will hold a conference call today, 3 November 2020 at 3:00pm to discuss the Unaudited 9M 2020. To obtain the dial-in details, kindly click  to register for the call

Interest expense printed at 71% of our FY 2020 estimate