Thursday, May 26, 2016 11.35AM / FBNQuest Research
Marked cuts to our EPS forecasts and price target
Fidelity Bank’s (Fidelity) underlying Q1 2016 results came in weaker than expected, mainly due to a negative surprise in non-interest income which was down by 35% y/y and a -N3.5bn loss on the other comprehensive income line.
As such, we have cut our 2016E EPS forecast by 47%; we shield our valuation slightly from the OCI loss, given its magnitude, by basing the derivation of our price target on our 2017E ROAE estimate, discounted back to 2016E.
As such, the cut to our price target of 34% is less than that to our 2016E EPS estimate. Although we have reduced our 2016E impairment forecast by 16% to reflect the positive surprise on this line in Q1, our cost of risk assumption of 1.3% is worse than guidance of 1.0%, given the challenging operating environment.
Consequently, our 2016E ROAE forecast of 3.9% (-490bps y/y) is well below guidance of < 10%. Despite shedding -19% ytd (vs -9.7% ASI), we find the shares expensive, with a downside potential of 22%. We downgrade our recommendation to Underperform from Neutral.
Weak other income &OCI loss weigh on PAT
Fidelity’s Q1 2016 results showed that while PBT declined by -15% y/y to N4.0bn, PAT fell by a wider margin of -99% y/y to N71m. Further up the P&L, although profit before provisions grew by 6% y/y and loan loss provisions fell by 28% y/y, a 16% y/y spike in opex resulted in PBT declining by 15% y/y.
A negative result of -N3.5bn in other comprehensive income (OCI) amplified the y/y (-99% y/y) decline in PAT. Moving back to the pre-provision profits, although funding income grew by 30% y/y, a 35% y/y decline in non-interest income was responsible for the single-digit growth in pre-provision profits.
The Q1 quarter marks the third consecutive quarter of y/y decline on Fidelity’s non-interest income line. Sequentially, PBT grew markedly by a factor of 17.1x q/q, but only because of a weak comparable in the prior quarter.
Despite the stellar growth in PBT, PAT fell by -99% q/q because of base effects: a positive result of N717m in the OCI line in Q4 2015. Compared with our forecasts, PBT missed by 15% because profit before provisions came in around 11% lower than what we had modelled.
Although the weak (-26% vs our est.) other income line was the major driver behind the miss in pre provision profits, funding income which missed by 5% also contributed.