Fidelity Bank Plc : Analyst's preferred Tier 2 Bank. Emmanuel Adeleke   


01 November 2018 : Fidelity Bank posted its nine-month 2018 result which was impressive on the back of a 55% YoY decline in loan-loss provision which masked the weak non-interest revenue (NIR) and lower operating efficiency. The result came slightly above analyst's expectation with 9M 18 EPS (N0.62) printing at 81% of their FY 18E EPS of N0.82. Relative to their expectation, the variance stemmed from a slower growth in funding cost as well as lower than expected loan-loss provisioning.


Following discussion with management via its conference call on Tuesday, analysts have updated their model on the bank and made specific revisions to their estimate. Specifically, analysts made a downward adjustment to NIR informed by their expectation of lower growth on net fee income and net gains from financial instruments. Analysts have also revised their funding cost lower to 7.2% (previously 7.4%) which should drive a 40bps expansion in FY 18E NIMs to 6.2%. Elsewhere, analysts have reviewed their loan growth forecast higher to 10% (previously: +6% YoY) given current run rate of 8% YTD. Consequently, asset yield should print slightly higher at 14.3% (Previously 14.2%). On asset quality, analysts have revised their Cost of Risk forecast for 2018 lower to 0.6% (previously 1.0%) which now informs loan-loss provision of N5.1 billion (previously: N8.2 billion).


On balance, analysts are now more optimistic over their expectation for earnings growth. Net impact of their adjustment translates to an EPS of N0.82 (previously N0.76) in FY 2018 (FY 19E: N1.09).

             

 Over FY 2018, analysts expect ROAE to expand 108bps YoY to 10.8% and average 12.3% over the next four years. Post adjustments, their FVE for Fidelity increases to N2.92 (vs. N2.82 previously). Analysts maintain their BUY recommendation on the stock. Fidelity trades at a FY 18E P/B of 0.36x, a premium to Diamond (0.14x) and FCMB (0.18x), which analysts think is justified based on its first-rate ROAE (10.8%) in FY 18E relative to Diamond (2.1%) and FCMB (6.0%). At current price, analyst's expected dividend of N0.15 over FY 18E translates to a dividend yield of ~7%.


Parsing through the breakdown, funding cost (-192bps YoY to 6.1%) came in significantly lower but was outweighed by a decline in asset yield1 (-130bps YoY to 13.3%) resulting to a mild contraction in NIMs (-69 bps YoY to 6.4%). According to management, the lower funding cost over the period reflected improved deposit pricing as average cost of deposits dropped to 6.2% from 7.2% in 9M 17. To buttress, growth in CASA as a share of total deposit was relatively flat at 73.6% (9M 17: 73.5%). Consequently, expansion in interest expense (+9.8% YoY to N62.2 billion) was largely driven by growth in borrowing cost (+54% YoY to N16.8 billion) and to a less extent growth in interest expense on customer deposits (+1.0% YoY to N45.4 billion).


Lower impairment charge buoys earnings. Surprisingly, the bank posted a faster than expected decline in loan-loss provisioning (-55% YoY to N3.3 billion) with Cost of Risk moderating to a record 9M low of 0.53% (-77 bps YoY). From their discussion with management, analysts believe the bank has made adequate provisioning following the implementation charge2 on IFRS 9 in Q1 2018 which was charged to the bank’s regulatory risk reserve3. Supporting the decline was also a write back of N3.3 billion on loans to the manufacturing sector which was booked in H1 18. Asset quality continued to fare better with NPL ratio declining 40bps YTD to 6.0%, almost below the bank’s target for FY 18. Capital adequacy maintained its stance in Q3 18 at 17.0% and currently 100bps higher YTD.


Lower FX gains drives NIR lower. Over 9M 18, NIR moderated 8.7% YoY to N15.7 billion. As mentioned earlier, the bank did a reclassification from its NIR to interest income. Specifically, gains amounting to N3.8 billion and N3.4 billion was reclassified from credit related fees and interest income on financial assets measured at FVTPL respectively to interest income. Irrespective, despite an increase in fee income (+12% YoY to N12.5 billion), the lower NIR reflected a sharp moderation in FX gains (-46% YoY to N2.6 billion). On other front, operating expenses surged 6.5% YoY to N50.6 billion largely on account of higher AMCON charge (+29.8% YoY to N6.3 billion) with Cost to Income ratio climbing 160 bps YoY to 68.4%.


Q3 Earnings. Pressure on asset yield was more telling on earnings in Q3 standalone with interest income declining 3.0% QoQ to N40.4 billion. Also, the bank faced pressure from lower NIR (- 13.1% QoQ to N5.5 billion). On balance, despite a decline in loan-loss provision (-63.4% QoQ to N692 million) and lower funding cost (-1.2% QoQ to N20.2 billion), net impact of lower interest income and weak NIR drove PBT lower by 12.1% QoQ to N7.1 billion.


Key take-away from Conference Call


LoanBookGrowth.Managementiscomfortablewithitsloanbookgrowthdespitetheloanbook moderation by peers. Growth in loan book was driven by Oil & Gas (Services), Manufacturing, Transport and Government sectors. These four sectors accounted for 70% of the increase in loan book.


Reclassification of Income. After close look by auditors, gains amounting to N7.2 billion from Non-interest revenue had to be reclassified to interest income after a review of the underlying transactional income. According to management, this reclassification involved gains which are tied to interest earnings but erroneously recorded as Non-interest revenue.


FX translation. Following the convergence in the NIFEX and NAFEX rate, the bank expects to book revaluation gains and income accretion in Q4 on the back of its net long dollar position (~$200 million). FCY makes up 15% of the bank’s NPL and expected provisioning on this front should not exceed N1.5 billion. On balance, management does not expect this translation to affect profitability.


9Moble Exposure: Management highlighted that no provision was booked on its exposure to 9Mobile in Q3. The bank has made a total of 50% provisioning on this exposure and does not expect any additional provisioning.


Revision to forecast


Analysts have revised their Cost of Risk forecast for 2018 lower to 0.6% (previously 1.0%) on the back of adequate provisioning made so far and also an improving macro-economic landscape. Analysts maintain their NPL ratio at 6.1% for FY 18 (FY 19: 5.3%). Despite their expectation for additional impairment in Q4 on the back of convergence in the NIFEX and NAFEX rate, analysts remain optimistic concerning lower impairment charge for FY 2018 (-55.3% YoY to N5.1 billion). To add, analysts expect to see additional write-backs in the coming periods.


NIR to print lower YoY. Following the reclassification of Non-interest revenue, analysts see lower growth on net fee income and net gains from financial instruments. Analysts now see fee income growing at 15.4% YoY (previously: 41% YoY) to N16.8 billion on the back of expansion in credit related fees. Despite gains on this front, lower FX gains (-50% YoY to N5.5 billion) over 2018 should leave NIR depressed. For context, the duo impact of high base from last year with current convergence between the NAFEX and NIFEX presenting a constraint to booking additional FX gain informs analyst's expectation for lower FX gains. On balance, NIR should decline 12.5% YoY to N22.6 billion.

             

Higher loan growth to drive net interest income. Analysts had earlier expected higher growth in funding cost to put pressure on Net Interest Earnings. Now, analysts see support from interest income following the reclassification of NIR to interest income and also their higher loan book growth forecast. For emphasis, analysts expect interest income to grow by 8.4% YoY to N163.4 billion largely on the back of higher income from customer loans (+8.1% YoY to N118.1 billion). Elsewhere, interest income from investment securities should expand 9.9% YoY to N40.1 billion). On the other hand, analysts still expect interest expense (N88.0 billion) to grow at a faster pace of 11% YoY largely on the back of higher borrowing cost (+33.5% YoY to N22.4 billion) and to an extent higher funding cost on term deposits (+4.9% YoY to N54.8 billion). On balance, analysts expect Net Interest Income to expand 5.9% YoY to N75.7 billion.


Elsewhere, analysts maintain their forecast for operating expense (2.4% YoY to N67.3 billion) with Cost- to-Income (CIR) expected to print at 68.4% (FY 17: 67.5%). Net impact of analyst's overall adjustment translates to PBT of N25.9 billion (Previously N24.1 billion) over FY 18E. Thus, analysts estimate EPS of N0.82 (+25% YoY) and N1.09 over FY 18 and FY 19 respectively. In addition, analysts forecast a dividend pay-out ratio of 20% (FY 17: 17%) which translates to DPS of N0.16 (FY 17: N0.11) and dividend yield of 7% based on current pricing.


Post adjustments, analyst's FVE for Fidelity increases to N2.92 (vs. N2.82 previously). Analysts maintain their BUY recommendation on the stock. Fidelity trades at a FY 18E P/B of 0.36x, a premium to Diamond (0.16x) and FCMB (0.18x), which analysts think is justified based on its first-rate ROAE (10.8%) in FY 18E relative to Diamond (-1.1%) and FCMB (6.0%). At current price, analyst's expected dividend of N0.15 over FY 18E translates to a dividend yield of ~7%.



Reporting for EasyKobo on Thursday ,1 November 2018 in Lagos, Nigeria


Source: ARM Securities Limited


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