Fidelity Bank Plc: Projected fall in operating income warrants downgrade-Chapel Hill


Thursday, December 12, 2013 4:34 PM / Chapel Hill Denham Research

Click here to view the detailed report

Fidelity Bank Plc
(Fidelity) recently published its 9M-13 results which showed an EPS decline of 16% yoy, behind of our FY-13E run-rate of a 12% yoy growth. Subsequently, we cut our 12-month target price for Fidelity down to N2.93 from N3.81 and downgrade the stock to a HOLD.

 Expected fall in operating income warrants downgrade

Forecast and rating reviews: We downgrade our recommendation on Fidelity to a HOLD from a BUY. We cut our FY-13E EPS by 38% to N0.49, which primarily reflects an expected fall in operating income as a result of a likely decline of 14% yoy in net interest income during the year. EPS should however grow by 44% yoy to N0.71 in FY-14E, due to an expected recovery in net interest income. In spite of the likely recovery in FY-14E earnings, our average ROAE forecast for the period between FY-13E and FY-15E is lower at 10.5% compared to 13.1% previously.

Gross loan to deposit ratio to remain stable around 50% in the short term. We expect a marginal increase in Fidelity’s gross loan to deposit ratio to 51% in FY-13E from 50% in FY-12. We are encouraged by the bank’s strong deposit drive and the subsequent loan book expansion, which is evident in the 9M-13 numbers. We think customer deposits will grow by 28.6% yoy in FY-13E to N921.8bn, driven by demand deposits. Accordingly, we expect robust growth of 30.2% yoy in FY-13E in gross loans to N467.3bn, given the bank’s strong focus on financing oil & gas and power sector projects. We expect cost of risk (CoR) to decline to 1% in FY-13E from 1.3% seen in FY-12, in line with our coverage average CoR of 1% for FY-13E.

Computed net interest margin (NIM) to decline to 4.4% in FY-13E from 5.5% in FY-12, before picking up in FY-14E. We think both yield on assets (YoA) and cost of funds (CoF) will contribute to the expected decline in FY-13E NIM. Following the hike in public sector CRR by the CBN, we expect increased lending to corporate clients and a resulting moderation in YoA by 40bps to 11.3% in FY-13E. Also, CoF is likely to come under pressure as competition for customer deposits increases, particularly in Q4-13. Sequentially, we see CoF inching up by 30bps to 6.9% in FY-13E.

Cost to income ratio (CIR) to rise as operating income falls quicker than operating expenses (opex). We expect Fidelity’s FY-13E CIR to ascend to 68.2% in FY-13E from 62.3% in FY-12. We think our expectation of a 2.2% yoy decline in opex to N46.9bn will be fully offset by the expected 10.6% yoy decline in operating income to N68.8bn. Consequently, we expect FY-13E PBT to contract by 19% yoy to c.N17.4bn from N21.6bn in FY-12.

We downgrade our BUY recommendation on Fidelity to a HOLD, following the downward review of our 12-month TP to N2.93 from N3.81. Our TP implies a potential upside of c.15%. Fidelity has underperformed the market on a YTD basis, delivering 15% vs. 38% for the NSE ASI. The bank currently trades on an FY-14E P/E and P/B of 3.6x and 0.4x vs. our banking coverage average of 5.4x and 1.0x respectively.

While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the authors best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This article is published with the consent of the author(s) for circulation to the online investment community in accordance with the terms of usage. Further enquiries should be directed to the author whose e-mail is Chapel Hill Denham Research [  

Related News