· Fidelity Bank (Fidelity) reported gross earnings of N70bn for 12 months ended December, representing 26% YoY growth and 4% above our estimate. However, PBT (N7.7 billion) and PAT (N5.4 billion) decline 11% YoY each and were, respectively, 34% below and 41% below our estimates.
Topline growth persists
· Fidelity’s top-line performance represents a significant acceleration from 14% as at 9 months results. As expected, Fidelity sustained its steady risk asset creation through H2 2011 growing loan book by 61% to N257 billion by FY 2011. A significant portion of the growth came in Q4 as Fidelity sought to adequately deploy its rapidly expanding balance sheet, finding some outlet in investment securities which more-than-doubled YoY to N91.4 billion. Both sources drove the 20% YoY jump in interest income to N48 billion, in line with our estimates.
· On a quarterly basis, revenues were up 35% QoQ in Q4 reflecting further support from the higher interest rates prevailing at the time. Non-interest income also came in significantly stronger in the quarter (+46% QoQ) which reflects stronger fee income.
Balance sheet expansion funded by deposits
· Similar to peers, Fidelity’s balance sheet expansion has been largely funded by low cost deposits. Deposits rose 72% in 2011 to N560 billion, much faster than the 53% we expected, with the higher volumes largely responsible for N19 billion interest expense being 8% ahead of our estimates. After a sharp improvement in Q3, WACF was unchanged at 3.4% which is nevertheless lower than for peers like Sterling (3.5%), FCMB (6%) and Skye (4%). Management indicates low-cost funds now make up 71% of deposits thanks to a successful branch roll-out program.
But associated costs adversely impact opex
·However, the rollout is still at a stage where it is adversely affecting costs, as cost-to-income ratio worsened to 76% from 71% in 2010. According to management, “operating expenses rose by 30% to N38.88 billion in 2011 from N29.86 billion recorded in 2010, due to sustained branch development activity, impact of industry resolution cost which gulped N1.5 billion in FYE 2011, and one-off additional provision of N2.2 billion needed to write up the actuarial valuation of the net present value of future staff retirement benefit obligations preparatory to full compliance with International Financial Reporting Standards (IFRS).”
Provisions cause further damage
· In a recurring theme for the industry, provisioning, at N4.5 bn, came in much higher than the N2.8 bn we envisaged, and was a significant jump from Q3 2011 levels (N1.4 bn). We suspect part of the additional charges related to further clean up of the loan book as Fidelity continues to strive to improve asset quality.
·Relative to our estimates, the provisions and higher opex were wholly responsible for PBT and PAT falling short as operating income was 2% higher than our estimates. On a quarterly basis, PAT was a meager N165 million with a loss after tax of N631 million.
Growth prospects complemented by attractive valuations
·Fidelity declared a dividend of N0.14 per share which represents 74% payout. In our view, this underscores the (over) sufficiency of capital with, CAR at 30%; Fidelity having recorded little credit growth until recently. To the extent, that recent surge in risk asset creation was dependent on significant progress with its asset clean up which cut NPL ratio from 30% in 2009 to 13% as at Q3 2011, we are optimistic about further revenue growth with muted adverse impact from loan losses.
· Furthermore, Fidelity attributed the improvement in non-interest income to its growing customer base and branch network. We believe this is likely to persist alongside the positive impact on funding costs. However, we expect the opex run-rate to remain elevated in coming quarters as the branch roll-out continues, in line with Fidelity’s focus on organic growth in the near-to-medium term.
· Nevertheless, Fidelity continues to trade at valuation discounts relative to peers with PE of 7.8x and P/Bv of 0.3x comparing with industry averages 10x and 0.9x, respectively.
We maintain a BUY rating
· In addition, the 145% upside potential from current price to our fair value estimate of N3.8 appears compelling and we reiterate our BUY rating on the stock.
ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
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