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Stock Report - Fidelity H1 2020 - Feeble earnings outlook, albeit potential for upside remains

• Last week, Fidelity bank released their H1 2020 audited results showing a significant expansion of 21.9% YoY in PBT and a 33% YoY growth in PAT. Precisely, the combination of 17.8% expansion in non-interest revenue to N18.3bn and 2.1% increase in interest income to N87.6bn over the period neutered higher operating cost (+8.3% YoY) and loan-loss provisioning (+1362% YoY to N7.8 billion). For context, growth in interest income mirrored higher interest income on investment securities and interest on loan to customers as loans grew by 7.3% YTD. Meanwhile, improvement in Non-interest revenue (NIR) reflects the FX revaluation gain of N7.4 billion (+152% YoY) booked over the period.
• Fidelity Bank held a conference call on Tuesday to discuss its H1 20 results and outlook for the rest of the year. Key focus at the call were trends in impairments, loan book and growth in deposits. Despite present run rate of 9.4% in H1 2020 coming behind FY 2020 ROE guidance of 11.3%, management maintained same guidance for the full year. Save for the adjustments on Non-interest revenue and loan loss provisioning, our views remain unchanged. We maintain our FVE of N2.9 which implies a potential return of 61% and maintain our BUY rating.
• On the call, management attributed the growth in impairments to the impact of covid-19 on several sectors as impairment charge rose to N7.8 billion compared to a net write back of N621 million in H1 19. This translated to a higher cost of risk, printing at 1.3% compared to -0.1% in H1 2019. Elsewhere, consistent with the recent naira devaluation, Fidelity bank marked up their foreign currency books with an exchange rate of N386.75. This had a 1.4% YoY impact on total deposits and a 2.8% YoY impact on net loan book. YTD, total deposits is up by 14.8% to N1.4 trillion from N1.2 trillion in FY 2019 due to growth across all deposit products. Local currency deposits increased by 18% YTD, printing at N1.1 trillion representing 76.1% of total deposits. Meanwhile Foreign currency deposits increased by 4.2% YTD to N300.8 billion and now accounts for 21.4% of total deposits.
•  Notably, Fidelity announced plans to issue up to N50 billion in local bonds in Q4 2020 in other to refinance existing debts as yields decline. The new issue will be made to redeem existing N30 billion bonds issued at 16.48%. Management expects the bond issuance to increase their tier 2 capital and consequently lead to c.200bps increase in CAR, which currently stands at 18.8%.
• For the rest of the year, management expects lower cost as AMCON charge has been fully paid over H1 2020, which is positive for them. In addition, the reduction in interest rate on savings deposits should reduce funding cost which is positive for them as well. On the flipside, management do not expect significant FX revaluation gains in H2 2020. Furthermore, management expects lower interest rate environment to put pressure on Net Interest Margin in H2 2020.
• In line with the foregoing, we revised our loan loss provisioning higher to N13.9 billion (previously N6.2 billion) following management’s increase in provisioning (+1436% YTD to N7.8 billion). We also revised our Non-interest revenue higher for FY 2020 by 13% to N29.4 billion (previously N25 billion), albeit, we expect Non Interest Revenue to be lower in H2 2020 relative to HI 2020 as the bank mentioned that bulk of their revaluation gains were recorded in the first half of the year. Overall, we expect the impact of higher loan loss provisioning to outweigh our upward revisions to Non-Interest Revenue. Asides these adjustments, we left our other estimates unchanged. We expect a moderation in Profit After Tax by 19% YoY to N23 billion in FY 2020. We have a FVE to N2.9 which translates to a BUY rating on the stock based on the last closing price of N1.8 with an upside of 61%. FIDELITY trades at a current P/B of 0.21x with an ROAE of 9.4%.