Fidelity Bank Q3 2020 Results Review: On Track to Deliver 16% ROAE in 2020E


Wednesday, November 04, 2020   /11:15 AM / by FBNQuest Research / Header Image Credit: Business Day

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Material upward revisions to our 2020-21E EPS forecasts

Fidelity Bank's (Fidelity) Q3 2020 PBT declined on a y/y basis. However, it was the bank's strongest quarterly performance year-to-date as PBT of N9.4bn came in c.57% higher than the average quarterly PBT run rate for H1 2020. PBT also beat the N5.0bn that we had modelled because of positive surprises in opex and loan loss provisions.


Further down the P&L, the variance in PAT relative to ours was even wider because of a positive result of +N2.4bn in other comprehensive income (OCI). Consequently, we have cut our 2020-21E opex forecasts by -10% on average. We have also made a slight reduction of 5bps to our 2020E cost of risk assumption to 1.25%. These revisions (together with the OCI for 2020E) are the main drivers behind increases of 40% and 12% to our 2020E and 2021E EPS forecasts.


Our new price target of N3.43 is also c.13% higher. Our new forecasts translate to a 2020E PAT of N40.9bn and an implied 2020E post-tax (& OCI) ROAE of 16.2%. On its conference call, management disclosed that plans to refinance its N30bn bond with a new bond (issue size of N50-75bn) are at an advanced stage. The new bond issue which is expected to be completed by the end of Q4 2020 will take CAR north of 20% from 18.2% currently.


On a relative basis, Fidelity Bank shares are trading on a 2020E P./B multiple of 0.3x for 8.8% ROAE in 2021E. The multiple represents a discount of c.-60% to the 0.6x average that our universe of bank stocks is trading on. Our new price target implies a potential upside of 43% from current levels.


Also, the bank's 2020E dividend yield of 9.1% is slightly better than the 8.5% median for our coverage universe. Nonetheless, we retain our Neutral rating on the shares because we see greater upside potential elsewhere within our coverage universe.


Q3 PAT up by 66% y/y, thanks to positive OCI of N2.4bn

Fidelity's Q3 PBT fell -13% y/y to N9.4bn, driven by a (+561% y/y) spike in credit impairments, offsetting a 4% y/y increase in pre-provision profits. In terms of revenue contribution, funding income, which expanded by 25% y/y following a 5% q/q growth in net loans and lower funding cost, was the main driver.


In contrast, non-interest income fell -59% q/q due to a -31% y/y reduction in net fee and commission income and losses in T-bill trading and other operating income. Below the tax line, PAT expanded by 66% y/y, but only because of a positive result of N2.4bn in OCI vs. -N3.6bn in Q3 2019.


Sequentially, PBT increased by 75% q/q. However, PAT fell -23% q/q because of a -75% q/q reduction in OCI. 


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