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.