Tuesday, April 05, 2016 9:55AM /FBNQuest Research
Upgrading to Neutral but keeping forecasts below guidance
Fidelity Bank’s (Fidelity) 2015 results showed that PAT came in better than expected, thanks to positive results on the tax and other comprehensive income lines. We have raised our 2016-17E EPS forecasts by 75% on average and our price target by 70% to N1.4 on the back of higher net interest margins (c.50bps vs our previous estimate).
That said, our 2016E PBT forecast of c.N16bn (+14% y/y) is below management’s implied guidance (+15-20% y/y). We expect another year of sub-10% ROAE for Fidelity in 2016. Our 2016E ROAE forecast of 7.2% is below the 8.8% the bank delivered in 2015.
Our conservatism relative to management can be traced to a cost of risk assumption of 1.5% vs guidance of 1.0% and a -3.0% y/y reduction in opex vs guidance of -5.0%. Fidelity Bank’s shares have tracked the NSE ytd broadly, shedding -10.7% vs. the ASI’s -11.5%. From current levels, our valuation implies a potential upside of 8%. We have upgraded our recommendation to Neutral from Underperform.
PAT up by 116% y/y thanks to a tax credit and OCI gain
Fidelity’s Q4 2015 results showed that although PBT fell by -89% y/y, PAT still grew by 116% y/y to N3.2bn. The stellar growth in PAT was driven by a tax credit of N2.2bn and a positive result of N717m on the other comprehensive income (OCI) line (compared with a negative result of –N1.1bn in Q4 2014). Further up the P&L, although profit before provisions grew by 14% y/y, PBT fell by -89% y/y due to a 35% y/y spike in opex.
The rise in opex more than offset a -24% y/y reduction in loan loss provisions to N1.8bn. Returning to pre-provision profits, the growth on this line was driven by a remarkable growth of 67% y/y in funding income which more than offset an -83% y/y decline in other income.
In terms of sequential trends, PBT declined by -94% q/q on the back of a combination of factors including opex growth of 21% q/q, a 128% q/q rise in impairment charges and an -84% q/q reduction in other income.
However, thanks to the positive results on the tax and OCI lines, the decline on the PAT line narrowed to -2% q/q. Relative to our forecasts, PBT missed by 73%, largely because of negative surprises in opex and other income. However, thanks again to the positive surprises on the tax and OCI lines, PAT beat by 268%.