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

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

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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.

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