Big is beautiful: We upgrade the Fidelity Bank (FIDBAN) 10.5% 2022 bond back to Buy from Hold. Spread differences relative to the sovereign, and to larger peers, have widened in recent months, and we do not believe this is justified based on the bank’s fundamentals. The FIDBAN bond is now quoted almost 200bp wider than the NGERIA 2023, 150bp wider than the ZENITH 2022s and 100bp wider than the UBANL 2022s. We acknowledge that the cash price is already quite high, and in absolute terms, the bond has already performed well. However, with total assets in excess of NGN2.1trn at YE 2019, Fidelity Bank is larger than Diamond Bank ever was. Spreads could narrow relative to other Nigerian lenders if the regulator chooses to officially classify FIDBAN as a systemically important lender. We note that Fidelity Bank has an international banking licence and management already targets a total capital ratio of at least 16%. Thus, such a change in classification should not significantly alter the way in which capital is managed. However, it may increase the perceived probability of Fidelity Bank receiving support in the unlikely event of this being required.
We stress that there can be no certainty that Fidelity Bank will be classified as systemically important. It is not fully clear what metrics the CBN considers in these decisions – looking at customer deposits instead, at Diamond Bank these balances previously exceeded the latest Fidelity Bank level.
FY annualised ROE was almost 14%: To meet updated disclosure requirements, Fidelity Bank published unaudited results for FY 2019. Fully audited results for that period are expected on 23 March. The issuer disclosed net income of over NGN29bn for 2019, 29% higher than in the previous year, reflecting a provisions reversal of NGN6.9bn. At least part of this relates to derecognition of an asset, which the bank discussed in a previous results release. Operating profit fell yoy, as decent revenue growth was more than offset by higher costs. Fidelity Bank’s FY 2019 ROE was almost 14%, a solid result for this bank.
Noteworthy core revenue growth: Operating revenue of NGN106bn was 5% higher than in 2018, driven by strong core revenues. Net interest income was 12% higher, at NGN82bn. Strong loan growth (up 30% yoy) is likely to have been the key driver of this. We note that demand deposit growth improved in the final quarter of the year, and these lower-cost funds accounted for 35% of total deposits at YE 2019. Net fee and commission income was 17% higher than in the previous year, at just over NGN20bn, as ATM charges, accounts maintenance fees and e-banking commissions all increased. There was also a significant rise in ‘other’ fees. We expect to get more information on this when the bank publishes audited FY 2019 figures. A previously-disclosed asset derecognition charge and lower foreign currency gains led to a decline in trading and other income. However, core revenue growth offset this, leading to the rise in operating revenues mentioned earlier.
Room for improvement in cost/income ratio: Operating expense exceeded NGN80bn, up from NGN72bn in 2018, reflecting higher regulatory and other administrative costs. Personnel costs and depreciation and amortisation charges fell yoy. The FY cost/income ratio was 76%, up from 71% in 2018. This ratio remains higher than at a number of larger peers – there is clearly room for improvement here.
Stage 3 loans ratio was less than 4%: On our calculations, the ratio of Stage 3 loans improved to 3.6% from 5.7% a year ago, and coverage improved to 119%. Strong loan growth contributed to the improved NPL ratio, as did write-offs and changes to cashflows due, particularly on retail loans. This meant that Stage 3 retail loans fell to NGN6.4bn from NGN17.7bn last year.
No near-term liquidity concerns: The LDR improved to 92% from 96% at the end of September, as deposit balances rose by a very strong 10% in the final quarter of the year. Solid growth in demand and savings deposits drove this increase. The bank reported cash and equivalents of over NGN267bn, up from NGN247bn at the end of the previous year, and accounting for almost 13% of total assets. Fidelity Bank still has just one USD-denominated eurobond outstanding, and that US$400mn security does not mature until October 2022. We do not see near-term liquidity as a concern at this bank.
Modest decline in equity/assets ratio: The unaudited results do not include the usual capital ratio disclosures. However, we note that Fidelity Bank’s equity/assets ratio was 11%, down c30bp qoq, driven by a 7% rise in total assets. We expect more details on capital when the bank publishes audited results for 2019.