Fidelity Bank: Analysts lower lender’s estimates on assets quality concern

Fidelity Bank: Analysts lower lender’s estimates on assets quality concern

Fidelity Bank is facing steep cost pressure that is diluting lender’s margin, though analysts recognised that growth in earnings asset drove top line performance in the first quarter of 2020.

Traded at ₦1.83 on the local bourse, Fidelity bank market capitalisation settled at ₦53.023 billion on 28,974,797,023 shares outstanding.

In its Q1:2020 results, the bank declared a decent topline growth of 5.65% to ₦51.16 billion.

While interest income advanced by 11.40% to ₦43.93 billion, non-interest income significantly lagged its corresponding year performance by 19.56% to settle at ₦7.23 billion.

Interest income from loans, which typically accounts for 75% of total interest income, drove interest income growth with its 13.90% growth.

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This performance was supported by a 3.45% year to date increase in the bank’s loan book to ₦1.17 trillion as at end Q1:2020.

Analysts at Meristem stated that much of the growth in loan book at about 2.5% was caused by the devaluation of the Naira.

Meanwhile, non-interest income was dragged by a sharp decline at 35.60% year on year in net foreign exchange gains to ₦1.45 billion.

Analysts held that regulatory cut in fees also weighed significantly on fees and commission income, leading to a drop of 14.28% to ₦5.57 billion.

The management expects a decline in average purchasing power as a result of the ongoing COVID-19 pandemic to negatively impact transaction volumes, hence fee-based income is expected to trend lower.

Analysts believe that a loss of interest income may arise from slower real loan book growth, and the implementation of loan forbearance in accordance with CBN directive.

“We therefore expect a muted topline growth in 2020”, analysts at Meristem stated.

Meristem also stated that heightened operating expenses and impairment charges booked on credit losses depress lender’s profitability.

The bank result showed that operating expenses increased significantly by 29.57% to ₦21.63 billion driven mainly by regulatory costs (+35.80%), staff costs (+19.70%) and promotional expenses (104.70%).

Meristem remarked that the figure is 10.30% less quarter on quarter.

Analysts at Meristem still consider it elevated as its operating efficiency worsened cost-to-income ratio to 71.30% as against 68.40% in Q1:2019.

Similarly, impairment charge surged by 103.19% to ₦2.10 billion, following early assessment and provisioning for the impact of COVID-19 on risk assets.

Analysts stated that the fall in yield on earning assets to 11.80% as against 12.80% in Q1:2019 was met with a steeper decline in cost of funds to 4.40% compare to  6.60%, which improved net interest margin to 6.60% coming from 5.40% in Q1:2019.

Nevertheless, Meristem stated that the combined impact of high operating expenses and impairment charge weighed on bottom line performance with a 1.36% decline in profits to ₦5.86 billion.

In 2020, Meristem expects a decline in profitability on the back of muted topline performance and higher impairment charge.

The firm stated that this may however be cushioned by a moderated operating expenses growth given management’s expectation of running skeletal in-branch services while at least 50% of staff members work from home pending the resolution of the pandemic.

Analysts explained that asset quality of the lender’s weakens on COVID-19 risks

Meristem Securities stated that stage three loans surged by 50.40% year to date to ₦58.10 billion, caused by management’s decision to make early classification of loans to sectors prone to disruption by the lockdown.

More specifically, analysts held that the drivers of the NPL growth were from the Manufacturing, Transport, and General commerce sectors.

Hence, NPL ratio increased to 4.80% as against 3.30% in 2019.

Also, liquidity pressures heightened during the period, with liquidity ratio falling to 31.60%, coming from 35% at end-2019.

Analysts attribute this to hike in mandatory cash reserve deposits which surged +₦104.27 billion, bringing its effective CRR to 30.24% as against 24.86% 2019.

Nonetheless, Capital adequacy and LDR stayed above benchmarks at 17.70% and 66.00% respectively.

Meristem said: “Our expectations for a weaker earnings performance in 2020 remain unchanged from our last update”.

Hence, analysts maintain EPS of ₦0.89 and a target PE of 2.27x, which yields a December 2020 target price of ₦2.02.

This indicates a current upside potential of 10.38%. Thus, analysts rate the ticker a BUY.

Fidelity Bank: Analysts lower lender’s estimates on assets quality concern