Fidelity Bank Q2 2015 results - Better-than-expected Q2 2015


Tuesday, July 28, 2015 9:48 AM / FBN Capital Research

2015 guidance unchanged: Fidelity Bank’s management reiterated its 2015 guidance across the board. Better-than-expected Q2 2015 results provided a helping hand, thanks to non-interest income and opex. As a result, we have increased our 2015-16E earnings forecasts and our price target by just over 5%.

Our 2015E ROE forecast of 8.7% remains below management’s guidance of 10%, largely because we are still not comfortable with the bank’s guidance on asset quality. Management continues to expect its cost of risk for the year to be around 1.0%, better than our 1.5% estimate.

Although restructurings (oil and gas) have reduced some of the risk of asset quality deterioration, we expect to see more stress in the loan book in H2 2015. On our new estimates, Fidelity shares are trading on a 2015E P/B multiple of 0.24x for a 2016E ROAE of 8.5%. Our N2.2 price target implies upside potential of 43%. We retain our Neutral rating in the meantime, however, to reflect our view that the shares may not re-rate meaningfully until the risk of NPL formation reduces or until signs of ROE expansion start to become visible.

Improved Q2 2015 results; ahead of our expectations: Fidelity Bank’s Q2 2015 PAT grew 39% y/y to N4.3bn despite PBT coming in flat y/y at N4.96bn. The growth in PAT was down to base effects as Fidelity had reported a negative result of –N1.2bn on the other comprehensive income line in Q2 2014 vs N39m in Q2 2015. Although profit before provisions was up by 20% y/y, a 4.9x expansion in loan loss provisions and a 15% y/y rise in opex resulted in PBT coming in flattish y/y.

Further up the P&L, both revenue lines contributed strongly to the 20% y/y expansion in profit before provisions. However, funding income, which advanced by 22% y/y, was the stronger of the two, helped by relatively high yields, a 5% q/q expansion in the loan book and a 3% q/q decline in deposits.

Sequentially, PBT grew by 5% q/q. In contrast, PAT declined by -14% q/q mainly because of a significant reduction in other comprehensive income. Compared with our forecasts, PBT and PAT exceeded by 38% and 41% respectively because profit before provisions came in ahead and opex surprised positively by 4%

Recommendations and movements in price target

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