Fidelity Bank Plc - Deteriorating non-interest income warrants a TP cut


Thursday, November 20, 2014 4:18 PM / Chapel Hill Denham Research

Fidelity Bank Plc (Fidelity) recently published its 9M-14 results that showed EPS growth of 1.6% yoy, behind our FY-14E expected growth. Following new insight from the management call, we revise our 12-month target price down to N1.60 from N2.45 and downgrade our recommendation to a HOLD from a BUY.

Deteriorating non-interest income warrants a TP cut

Review of earnings forecasts: We forecast EPS growth of 81.5% yoy in FY-14E to N0.48, due to improved outlook on the bank’s operating income and efficiency. This however represents 20.8% decrease from our previous FY-14E EPS forecast. We also note that the robust FY-14E EPS growth is due to a low base effect, as EPS declined by 56.9% yoy in FY-13. Similarly, our FY-14E forecast ROAE is revised to 8.4% from 10.5% previously.

Loan-to-deposit ratio to accelerate to 65.1% in FY-14E from 54.9% in FY-13. We forecast 19.7% yoy growth in gross loans in FY-14E, down from 23.3% yoy in FY-13, as 12.1% qoq growth was recorded in Q3-14 alone. The 9M-14 numbers suggest that the bank is particularly aggressive in lending to the oil & gas, agriculture, transportation and general commerce sectors, while it looks set to cut back on lending to the communications and power sectors. With expected cuts in lending to the highest NPL contributors, we see the bank’s cost of risk dropping to 1.0% in FY-14E from 1.7% in FY-13. We forecast 1.0% yoy growth in customer deposits in FY-14E as 15.7% yoy decline in customer deposits neutralises 11.7% yoy growth in savings, term, and domiciliary deposits. The improved cost of fund (CoF) outlook is due to a 320 bps drop in the cost of term deposits between FY-13 and 9M-14.

NIM to ascend on account of higher yielding assets and with support from lower CoF. We forecast a FY-14E NIM of 4.7% for Fidelity, up from 3.2% in FY-13. We see net interest income (NII) growing by 62.5% yoy to N50.1bn in FY-14E from N30.8bn in FY-13, while the average interest earning assets will likely rise by 11.4% yoy. Fidelity’s 9M-14 results showed that the bank’s CoF dropped to 6.3% from 7.0% in FY-13. We forecast 2.8% yoy decline in interest expenses in FY-14E despite 11.0% yoy expected growth in average interest bearing liabilities. Its yield on assets (YoA) rose to 10.1% in 9M-14 from 9.1% in FY-13, supported by both loans and investments. We expect NIM to improve further to 4.9% in FY-15E driven by further increase in YoA.

Tamed operating expenses (OPEX) growth to bring down cost to income ratio (CIR) despite modest income growth. We expect Fidelity’s CIR to improve to 71.5% in FY-14E and average 71.9% between FY-14E and FY-16E, from 76.7% in FY-13. We see operating income growing by 5.9% yoy in FY-14E driven by the robust growth in NII, despite 37.2% yoy expected decline in non-interest income. We see OPEX dropping by 1.3% yoy in FY-14E as lower staff; marketing and administrative expenses ease the pressure from rising regulatory and depreciation expenses.

We downgrade our recommendation on Fidelity to a HOLD from a BUY as we lower our 12-month TP to N1.60 from N2.45, implying a potential downside of 5.88%. Fidelity has underperformed the market with YTD depreciation of 36.8% vs. the NSE ASI return of -17.4%. Fidelity currently trades on an FY-15E P/E and P/B of 2.9x and 0.3x vs. our banking coverage average FY-15E P/E and P/B of 4.2x and 0.8x respectively.

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