Initiation of Coverage: FIDELITY BANK PLC - A compelling player in the Tier II space

A compelling player in the Tier II space                                                    

We initiate coverage of FIDELITY with a BUY recommendation and a target price of ₦3.57. FIDELITY is currently trading at a 39% discount relative to our target price, which is combination of three valuation methods. Our Justified P/B valuation yielded a target price of ₦3.59, while our Gordon’s Growth valuation came in at ₦3.14 and our Residual Income valuation for the bank came in at ₦3.00. These valuations were weighted, combined, and rolled forward to arrive at our 12-month price target.                                                   

Over the last five years (2016-2020) the bank has grown total assets by a CAGR of 16.71% to over ₦2.7 trillion as at FY’20 and to over ₦3.1 trillion as of H1’21. Meanwhile, deposits have grown at an equally impressive CAGR of 16.46% in the same period. This aggressive growth has been driven by a digital-focused retail strategy, with the added implementation of agency banking allowing for a widespread growth in Current and Savings Accounts (CASA) deposits, which currently account for 75% total deposits.                                                         

Outside of the top five banks, Fidelity bank has the highest total assets, gross loans and total deposits. Simultaneously, the bank’s NPL ratio of 2.8% for H1’21 is currently the lowest in our coverage universe. The bank’s earnings have grown by a CAGR of 6.5% over the last five years in a highly competitive market, owing to strong core banking operations and an ever-expanding agency banking network. In that time, the bank has seen profits grow at an impressive CAGR of 22.3%, achieved through cost management strategies such as cutting staff size by 13.9%.                                                     

Casting forward, we are positive about the bank’s potential for growth, especially in the traditional banking segment. This optimism is driven by the bank’s current success in growing its loan book while maintaining stable NPLs below the 5% regulatory benchmark. Hence, we expect asset yield to average 8.6% through 2025, with loans expected to grow at a CAGR of 13.0% to reach ₦2.4 trillion, while total assets are expected to peak at ₦4.9 trillion in the final year of our forecast.                                                 

The looming threat of the growing FinTech industry is a long-term risk to the traditional banks as a whole. For Fidelity, the bank’s focus on core-banking is both a major competitive advantage, due to high barriers of entry, and a potential threat, should the market become even more competitive due to the advent of new industry systems such as the open banking API, which has the potential to transform the risk sector, making it easier to issue loans and increasing market competition.