We are downgrading our recommendation on the Fidelity Bank (FIDBAN) 10.5% 2022 bond to Hold from Buy. This bond is more than 300bps tighter than at the start of the year. In addition, the difference in spreads between FIDBAN and larger peers’ bonds, such as the Zenith Bank 2022s and UBA 2022s, has narrowed significantly since the start of the year.
A few one-offs impacted Q2 performance but overall, we think Fidelity Bank reported a decent set of results. Profitability at this bank has been quite strong for a second-tier lender in at least five consecutive quarters, and management has reiterated the FY 19 targets.
Potential consolidation in the banking sector could lead to further tightening relative to peers and is a risk to our view. Such consolidation could see FIDBAN form part of a larger banking group. We note that while management remains focused on organic growth for now, M&A activity has not been completely ruled out.