Q1 19 net income rose 28% yoy to NGN5.9bn, significantly ahead of our NGN4.7bn forecast. Strong non-interest revenues drove the better-than-expected performance, increasing by 87% yoy on aggregate due to significantly higher fees and net FX gains. On the downside, despite higher loan volumes (up 24% yoy), net interest income was weaker due to a sharp contraction in margins. There were also increases in operating costs and net impairment charge. However, the cost/income ratio fell by 7ppts yoy while the cost of risk was flat yoy at c0.5%.
Upgrade to Buy with an unchanged TP of NGN2.50 and 39% ETR. Following recent share price weakness (down 13% in three months) the stock has become more attractive, as it currently trades at FY 19f PB of 0.3x (83% discount to frontier peers). We are encouraged by Fidelity’s recent loan growth, which has significantly exceeded peers, as well as its growing digital banking franchise, which now has over two million digital banking customers and over 80% of all customer transactions done electronically. On the downside, we remain concerned about the bank’s weak operating efficiency, which continues to suppress its profitability. Stanbic remains our top pick among Tier-2 banks.
Non-interest revenues drove the top-line as net interest margins fell. Key drivers of the top-line were net FX gains (up 14x yoy) and net fees and commissions (up 47% yoy). Management attributed the FX income to its trading activity as well as a slightly higher FX translation rate. Fees were driven by higher e-banking income and transaction/account-related fees. Meanwhile, net interest income fell by 3% yoy due to a significant 1.2ppts contraction in the net interest margin to 5.1% (based on the bank’s disclosure).
Cost/income ratio improved, reflecting the strong non-interest revenue growth as operating expenses also rose by 10% yoy. The cost/income ratio moderated to 68% from 73% in Q1 18, but remains markedly ahead of the 59% average for our coverage universe. Drivers of the higher opex included regulatory, personnel and depreciation expenses.
Loan growth was sustained, but liquidity weakened. Gross loans rose 13% qoq, far ahead of our coverage universe for which volumes have declined by c6% qoq on aggregate. However, a more moderate 4% qoq increase in deposits resulted in a loan/deposit ratio of 95% (from 87% at end-FY 18 and well above the industry average of c62%), which could restrain future loan growth momentum. The NPL ratio moderated to 4.9% (down 0.8ppts qoq) largely driven by the gross loan growth, as NPLs fell 3% qoq (following improvements in loans to the transport sector).