Fidelity Bank H1''18 Results - Lower Impairments; Higher Non-Interest Income Propels Earnings


Thursday, September 27,  2018 / 04:37 PM / CardinalStone Research                   

 Fidelity Bank Plc (FIDELITYBK) H1’18 results – Gross earnings rose by 3.6% YoY to N88.9 billion, in line with our estimate of N86.5 billion (+2.8% deviation). More remarkably, after tax profit leapt by 31.1% YoY to N11.8 billion, ahead of our N9.4 billion projection (+26.1% deviation). On a quarterly basis, PAT improved by 56.0% QoQ to N7.2 billion thanks to an impressive 252.9% QoQ growth in non-interest income. 

Other highlights

  • Contrary to industry trend, FIDELITYBK grew its loan book in Q2’18 by 7.7% QoQ (+3.5% YtD). Notwithstanding, interest from loans and advances declined by 23.4% QoQ. This significantly muted the impact of a 12.3% QoQ increase in interest income from investment securities, as overall interest income during the quarter slipped 10.5% QoQ to N34.4 billion. 
  • Net interest income declined during the quarter (-18.0% QoQ) pressured by expensive deposits (61.2% of interest expenses) in the bank’s books. So far in H1’18, the bank has grown its term deposits (+37.3% YtD) much faster than its low cost deposits (+13.9% YtD). Though cost of funds declined 60bps YtD to 6.6%, we expect that FIDELITYBK will carefully monitor deposit mobilization strategies to prevent undue pressure on year-end earnings. Overall, net interest margin declined 80bps YtD to 6.5% in H1’18.
  • Notwithstanding, the bank’s earnings during the quarter was significantly boosted by non-interest income which grew 252.9% QoQ to N13.5 billion. Net fees and commission income improved 128.9% QoQ in Q2’18. This was supported by a N4.1 billion increase in credit related fees (Q1’18—N199 million; Q2’17—N325 million) given that the bank was able to grow credit assets during the quarter. Further propelling non-interest income during the quarter were FX and derivatives gains of N1.6 billion and N3.4 billion respectively.
  • Credit losses increased 169.4% QoQ in Q2’18 to N1.9 billion. Cumulatively though, impairment losses reflected a 46.1% YoY decline compared to H1’17. Overall, cost of risk declined to 0.7% from 1.5% in FY’17, while NPL ratio declined 30bps to 6.1%.
  • Liquidity ratio declined to 33.2%, though above the regulatory threshold of 30.0%, while capital adequacy ratio (CAR) improved by 1.0pts to 17.0%, above regulatory minimum of 15%. The growth in CAR was mainly driven by the 4.9% increase in tier-I capital in the period.

Analyst take:

Overall, we like FIDELITYBK’s H1’18 performance notably the significant improvement in non-interest revenue during the quarter. More so, the bank was able to grow loans (+3.5%) in contrast to peers, which consequently led to the increase in credit related fees. 

However, we would like to see this loan growth translate positively for interest income in H2’18. We are also impressed with the improvement in credit quality, evidenced by the decline in cost of risk and NPL ratios. Though cost to income appears relatively stable at 67.7%, we believe that the bank has room to bring this number down through enhanced operational efficiency. 

Based on our last review, our target price for the counter is N3.24 (BUY) which is a 96.4% upside to last close price of N1.65. We will review our estimates following further discussion with management.


Editor’s Note

At the close of trading today, the shares of Fidelity Bank Plc moved up by a tick size of +1.76% to close at N1.73k from the previous price of N1.70k.  YTD, the stock has dropped by -29.67%.

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