Earnings Report /
Nigeria

Fidelity Bank: Q2 review: Significant impairment reversal drives bottom line; reiterate Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tellimer Research
    30 August 2019
    Published by

    Fidelity’s Q2 19 operating performance was weaker than expected, as pre-provision profits (PPP) fell 34% yoy to NGN6.6bn (versus our NGN10.2bn forecast). This was due to a 3% yoy decline in net interest income, as asset yields moderated yoy and operating expense increased by 22% yoy. These offset strong non-interest income growth as cost/income rose 13ppts yoy to 77% (versus our 67% forecast). There was a net impairment reversal of NGN6.5bn, which outweighed a loan de-recognition of NGN4.7bn and the weak operating results. Consequently, PAT was up by 7% yoy to NGN7.7bn, ahead of our NGN7.0bn forecast. Compared with Q1 19, PPP was 15% lower due to higher operating expense and PAT was 30% higher due to the net impairment reversal. No interim dividend was declared.

    Reiterate Buy with an unchanged TP of NGN2.50 (ETR: 57%). At FY 19f PB of 0.2x (76% discount to frontier peers), we find Fidelity’s valuation attractive. We are further encouraged by its recent loan growth, which has significantly exceeded peers, as well as its growing digital banking franchise with over 2mn customers and over 80% of all customer transactions done electronically. On the downside, we are concerned about the bank’s weak operating efficiency, which continues to suppress profitability and liquidity. Stanbic remains our top Tier 2 bank stock. 

    Loan growth momentum sustained, but liquidity remains weak. Gross loans improved by a further 3% qoq in Q2 and were up 16% ytd, far ahead of our coverage with a median 2% ytd decline. Non-performing (stage 3) loans rose 10% qoq, resulting in a 0.4ppts increase to 5.3% in the NPL ratio. Encouragingly, the bank’s NPL provisions coverage remained robust at 92% and there was a 0.4ppts improvement in the CAR to 17.0% versus end-FY 18. Deposits were up 8% qoq (12% ytd), although there was a 6ppts decline in the CASA ratio to 75% as term deposits shot up by 42% qoq. This could reflect liquidity challenges at the bank, as gross loans/deposits remained elevated at 96%.  

    Financial results summary 

    NGNmn
    Q2 19
    Q2 18
    yoy
    Q1 19
    qoq

    Net interest income (NII)

    21,125

    21,877

    -3%

    15,774

    34%

    Non-interest revenues

    6,926

    5,582

    24%

    8,627

    -20%

    Total income

    28,051

    27,459

    2%

    24,401

    15%

    Total opex

    21,477

    17,539

    22%

    16,692

    29%

    Pre-provision profit

    6,574

    9,920

    -34%

    7,709

    -15%

    Net attributable profit

    7,745

    7,217

    7%

    5,940

    30%

    Net loans

    999,319

    795,367

    26%

    966,254

    3%

    Total deposits

    1,097,011

    927,933

    18%

    1,016,999

    8%

    NII/assets

    4.44%

    5.74%

     

    3.52%

     

    Cost/income

    77%

    64%

     

    68%

     

    ROA

    1.63%

    1.89%

     

    1.32%

     

    NPL ratio

    5.28%

    6.10%

     

    4.93%

     

    *NPL provisions coverage

    92%

    109%

     

    115%

     

    Source: Company accounts, Tellimer Research. *Excluding any statutory reserves.