09, 2020 / 3:23 PM / by FBNQuest Research / Header Image
Credit: Business Day
2021 EPS forecast and new price target unchanged
Although Fidelity Bank's Q2 2020 PBT growth was stellar, management alluded to a more subdued earnings outlook for H2. The outlook is on the back of lower NIM expectation following i) higher reinvestment risk for soon to mature fixed income securities due to the subdued interest rate environment, and ii) interest rate reductions granted on some loans affected by the forbearance. About 32.5% of the bank's loan book was restructured. Given the CBN's recent resolve to address the challenges with fx liquidity via its recent interventions, management does not expect that the net fx gains which featured prominently in the H1 2020 results will repeat in H2.
Although we have not reflected the full magnitude of the positive surprise in non-interest income, we have increased our 2020E and 2021E forecasts for the line by 46% and 27% respectively. However, given the worsening outlook for NIMs, the upward revisions to our non-interest. income forecasts are offset by average cuts of 8% to our 2020-21E funding income forecasts. We have also increased our 2020E cost of risk assumption by 10bps 1.3%. Despite these revisions, our 2020E EPS forecast is up by 34% because of a positive surprise of N9.4bn in other comprehensive income (OCI).
However, our 2021E EPS forecast is unchanged. Despite rolling over our valuation to 2021E, our new price target of N3.05 is unchanged because of the limited changes to our 2021E EPS forecast and a 3% increase in our book value forecast for 2021E. In a bid to boost its CAR, management disclosed plans to refinance its N30bn bond with a new issue of c.N30-N50bn with a 7-10 year tenor. It is estimated that the new issue will boost CAR by about 200bps. Our new price target implies a potential upside of 69% from current levels. Despite the significant upside implied by our price target, we maintain our Neutral rating on the shares because we see greater upside potential in our tier 1 bank names.
Q2 PBT up by 72% y/y, largely driven by solid revenue growth
Fidelity's Q2 PBT grew strongly, by 72% y/y. The key drivers were a 56% y/y increase in pre-provision profits and a 5% y/y reduction in opex. In terms of the revenue drivers, funding income was up by 17% y/y following a sharp decline in interest expense due to the subdued interest rate environment.
However, non-interest income delivered a remarkable growth of 324% y/y. The solid performance of non-interest income was mainly driven by robust growth of 152% y/y in net fx gains to N7.4bn in H1 2020. These positives overshadowed a negative result of -N5.8bn in loan loss provisions (+N6.4bn Q2 2019). Below the tax line, PAT growth slowed to 21% y/y due in part to a -3% y/y reduction in other comprehensive (OCI).