Fidelity’s Q3 19 net income rose 13% yoy to NGN7.1bn, above our NGN6.4bn forecast due to lower-than-expected cost of risk of 0.2% (vs 0.5% forecast). Pre-provision profit (PPP) was up 11% yoy and in line with expectations, driven by increases across major revenue lines. Net interest margin was flat yoy, but better than expected at 4.4%, while cost/income ratio was higher than expected at 70%, but down 7.0ppts yoy. A significant net impairment reversal recorded in Q2 19 explains the 9% qoq decline in net income as PPP rose 31% qoq.
Loan growth and NPL decline match sector qoq trend. Gross loans were up 9% qoq, in line with peers, although above-average growth in previous quarters meant Fidelity’s 27% yoy growth was far ahead of the 6% rate for others. Stage 3 loans fell 3% qoq, driving a 0.5ppts decline in the bad loan ratio to 4.8%, while provisions coverage ratio remained robust at 97% (up 5ppts qoq).
Maintain Buy with TP of NGN2.30 and 54% ETR. At FY 19f PB of 0.2x (77% discount to frontier peers), we find Fidelity’s valuation attractive. We are also attracted to its recent strong loan growth, as well as its growing digital banking franchise, which now has over 2mn digital banking 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. Stanbic remains our top Tier 2 bank stock.
Our recently updated earnings forecasts and valuation estimates for our Nigeria banks coverage can be found here: Nigeria Banks: Good fundamentals, but tricky technicals; Buy.
Financial results summary
Net interest income (NII) | 21,347 | 20,110 | 6% | 21,125 | 1% |
Non-interest revenues | 6,944 | 5,531 | 26% | 6,926 | 0% |
Total income | 28,291 | 25,641 | 10% | 28,051 | 1% |
Total opex | 19,708 | 17,897 | 10% | 21,477 | -8% |
Pre-provision profit | 8,583 | 7,744 | 11% | 6,574 | 31% |
Net attributable profit | 7,078 | 6,278 | 13% | 7,745 | -9% |
Net loans | 1,074,096 | 830,375 | 29% | 999,319 | 7% |
Total deposits | 1,116,416 | 986,830 | 13% | 1,097,011 | 2% |
NII/assets | 4.4% | 5.0% |
| 4.4% |
|
Cost/income | 70% | 70% |
| 77% |
|
ROE | 12.9% | 13.3% |
| 14.8% |
|
NPL ratio | 4.8% | 6.0% |
| 5.3% |
|
*NPL provisions coverage | 97% | 107% |
| 92% |
|
Source: Company accounts, Tellimer Research. *excluding statutory reserves