Fidelity Bank earnings bumps reinforce forecast, says it’s able to defend margin

Fidelity bank Plc ( has raised its performance bar around improved digital business, and the management insists that they would protect margin from erosion.

In the period, net interest margin improved within the bank’s guidance to 6% as the growth in yield on earning assets outpaced increase in funding costs.

Meanwhile, in the last seven days, the bank stock has surged to N1.89 as against its lowest point at N1.68, thereby reduce year to date loss to 6.9%.

On Tuesday, the bank’s market cap closed at N54.182 billion on 28,974,797,023 units.

At the earnings call with analysts, the management stated there has been unstable yield environment, as fierce competition in that banking sector is affecting margin.

According to the bank, with the recent circular that have been issued, we expect there to be a decline in funding costs coming from depth of investment outlets for some of the maturing investments.

“We expect there to be a reduction in the yields also on the T-Bills”, the management said.

In the first quarter, the bank did 5.4% then 5.8% in the second quarter of the year. This came as net interest income grew marginally by 0.1%; But Fidelity Bank said it still able to defend margins.

The management said: “For this year, we targeted NIM of 6% to 6.5%. Return on equity was estimated for 2019 at 13%, but closed the period at 13.8%”.

On asset quality, non-performing loans ratio came down to 4.8% from 5.7% in 2018 financial year-end, due to loan growth and 4.9% decline in absolute NPLs in the third quarter.

Looking at NPL trend, there was a decline from 5.7% to 4.8%. The management said a lot of this is coming from the increase in the loan book and then, on a quarter-on-quarter basis, a decline in Stage 3 loans in oil and gas, manufacturing, real estate and construction.

“Despite the lower yield environment, we’re still able to grow interest income by 12.2%, on the back of the 18% expansion in the earning assets base”, the management said.

Speaking on the result, Gbolahan, Executive Director and Chief Operation & Information Officer said coverage ratio for Stage 2 is 8.5% and for Stage 3 is now 51.2%.

“We see the biggest movement is in manufacturing, transport, real estate and education. Not much has changed, downstream, manufacturing and the transport segment and then general commerce”, he added.

The management said 82% of transactions are now done on the electronic channel. Digital banking is now 31% of fee-based income. For savings, we are firmly on track for the sixth consecutive year of double-digit growth.

Speaking of the performance, Nnamdi Okonkwo, Fidelity Bank Plc Managing Director/Chief Executive Officer said the Bank closed the period with N23 billion pretax profit, a double-digit growth of about 15% when compare to 9 months of same period in 2018.

Okonkwo attributed the growth in PBT to 12% growth in interest income and 43% growth in fee income, which translated to a 9.3% increase in operating income. He said the 12.2% growth in interest income in the period was driven by 18% growth in earning assets.

On account of 43% growth in fee income, credit-related fees grew 132%; digital banking income grew 43%; trade income increased by 32% while account maintenance fee increased by 18%.

Also, the bank recorded a one-off asset disposal gain of N2.4 billion from expanse of land previously acquired which then boosted result.

On digital front, he said: “We’ve always talked about the fact that our retail banking would be driven mainly by digital play, and this has continued to gather momentum with customer base crossing the 5 million mark.

“Savings deposit is approaching the N250 billion with over 230,000 unique loans processed through our fintech digital lending partnership in less than 6 months.

“We have over 46% of our customers enrolled on our mobile app and USSD products, and digital banking which contributes over 31% of our fee income. This is in line with what we had projected when we set our 5-year plan”, Okonkwo said.

The bank said foreign currency deposit growth has been driven mainly by customers in energy, export business and retail segments riding on an app, our mobile app.

The Mobile app enables customers to transfer foreign exchange within the Central Bank limits on your own without even approaching the bank.

Fidelity said it grew loans from three key sectors: manufacturing, oil and gas and transport sector that account over 80% of loan growth.

The Bank Chief stressed that intervention funds contributed 22% of the total loans, and almost 50% of the growth in local currency loans in 2019 came from intervention funds.

According to him, the bank gross loans to funding ratio without applying the 150% weight assigned to retail and SME loans, stood at 68.4% when compared to 64.2% same period in 2018.

Taking the presentation further, Gbolahan said the bank customers’ accounts now 5 million, Mobile and internet banking customers are 2.3 million, and the card business is about 2.1 million.

“As per retail and digital banking, it saw 9% growth in savings deposits in 2019. For accounts acquisition, it has done 11%, added 0.5 million customers. This is the strongest growth we’ve had in the last 4, 5 years”, Gbolahan noted.

He said: “the retail loan book is up 25% on the strength of some of the partnerships we’ve done and new digital lending products. Internet banking customers are up 22% from the last financial year, and then the card business is up 5%”.

Expenses surged 14.5% on a year-on-year basis, on a quarter-on-quarter basis, expenses are actually down N1.8 billion, about 8% decline. Cost-to-income ratio remains sticky at about 71.7%.

Foreign currency deposits grew by about 46% on a year-to-date basis. Demand deposits up 10%; savings 9.2%; and time deposits, about 32%; other borrowings, about 68% and then on-lending facilities have expanded by another 24%.

Foreign currency deposits as at last year, it was N107 billion. Now it’s N263 billion. So, from contributing about 11% to total deposits, now contributes almost 24% of total deposits.

Retail assets have picked up gradually, and it’s about 4.2% of the loan book. The savings book is about N249 billion, getting close to the N250 billion threshold.

The breakdown of the loans into Stage 1, Stage 2, and Stage 3 saw a slight increase in the Stage 2 loan book, especially coming from the government and real estate sector.

The management said some of the obligors had some payment delays in the third quarter, which has now been rectified in fourth quarter, and that’s one of the reasons for additional N600 million impairment charges.

Capital adequacy closed at 16.4%. It was 17% in the first half, the bank said the decline was due to growth in the risk-weighted assets, coming from the credit risk-weighted assets and the profits for Q3 have not been capitalized by the end of the financial year.

It said the corporate book still has about 48% of the loan book and then contributes about 35% of profitability. That’s the corporate and investment banking, which includes treasury.

“We’re on track on all the indices, except the CIR numbers, which we will still work towards getting below 70% by the end of the financial year”, the Bank Chief said.

Fidelity bank said it has $400 million Eurobonds and then the other borrowings are roughly about another $300 million.

On possibility of raising funds, Gbolahan said right now, we have a 7-year N30 billion bonds issued in 2015 that’s callable after 5 years.

Currently, that bond only contributes about 40% when we’re computing capital adequacy ratio. So before the middle of next year, we are likely to go to the market and reissue that bond so it can count for Tier 2.

Gbolahan said: “Tier 1 and Tier 2, internal guidance is 14% and 2%, which takes us to our internal guidance of 16%”.

Speaking further on asset quality, Gbolahan said in terms of the Stage 2 loans, if you look at the movement over Q2 and Q3, a lot of the growth came from the real estate sector and the government sector, and that was because there were one or two delayed payments over 30 days.

Meanwhile, about N150 million to N175 million of that book has been restructured and a lot of the restructuring is from the power sector, the transport sector and the construction sector.

For digital loan products, Fidelity said it has partnership with a fintech, provide the customer base, and Fintech provides the balance sheet.

The management said: “We have about three loans in that digital segment. There is one where we don’t fund with our balance sheet”.

It said it funds the payday loan directly. In six months, Fidelity quick money had over 220,000 people apply for the loans.

The management said:  “We disbursed about 45,000 [of the loans], and the size of that book was less than N0.5 billion. So there are basically loans between N10,000 and N80,000 for between 2 weeks and 4 weeks”.

Meanwhile, Foreign currency (FCY) loan growth had a number of factors accounted for which include the increase in oil price, which remains stable.

The Bank said growth in transportation sector for loans are mainly vessels for the oil and gas industry. The management said it had pressure points some years ago when it came to financing general kinds of vessels.

“Cost of risk at 1.25% is our worst case scenario. If you look at what happened in Q3, we have some loans that had delays in payments, and because of that, we had almost N60 billion bumping into the Stage 2 loan book.

“Now the good thing is that they’ve been dealt with. But over the period, it has taken an additional impairment of close to N600 million because of that. What we can guide for is that we will not exceed the 1.25%”, Okonkwo said.

VIAJulius Alagbe, Economic/Financial Analyst
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