September 4, 2019/Meristem Research
Interest and Non-Interest Income Spur Gross Earnings Growth
Fidelity bank Plc. recorded a decent half-year financial performance with growth in its gross earnings (+12.31%) to NGN103.66bn, owing to growth in interest income +7.22%) and noninterest income (+6.31%). Although the yield on earning assets (-1.50%) was lower, the significant increase in the earning assets (+27.60%) provided the needed support for interest income. Non-interest income, once again, benefitted from an exceptional gain of NGN4.50bn in foreign exchange transactions and 26.31% growth in digital income.
In driving its growth strategy in a lower yield environment, the bank resort to expanding its interest earnings asset base by intensifying its deposit drive. The intense competition for deposits in the banking space led to an increase in expensive deposits for Fidelity bank, resulting in the increase in interest expenses (+16.53%). Consequently, the Net Interest Margin of the bank contracted by 130bps to settled at 5.80%, below its 2019 guidance of 6.00%.
Regardless, the bank recorded an increase of 15.05% in PAT to NGN13.63bn for the first half of the year. Our growth forecast for FY2019 remains stable; gross earnings (+8.56%), interest income (+10.59%), non-interest income (+9.61%), and interest expenses (+9.37%).
Write-back Supports Cost of Risk Guidance
The bank derecognised and reconstructed a loan facility which enabled it to record an impairment write-back of NGN4.00bn on the specific asset, bringing the total write-back in the period to NGN5.47bn. However, the reconstruction of the loan led to the bank incurring a net loss of NGN4.70bn which was charged off the income statement.
Although the transaction leaves the bank worse off by NGN0.70bn, the reconstructed assets increases the growth prospect for interest income for the bank.
Impressive Growth in Deposit and Loan book
To further its growth strategy, loan book expanded by 17.58% in H1:2019, with retail loans ticking up by 4.26%, following the launching of its digital lending product. The growth in loan book was instrumental to the decline in the NPL ratio by 30bps to 5.40%, within its FY2019 guidance. To support the growth in loans, deposits grew by 12.01%, driven by strong growth in term deposit (61.87%) which brought CASA mix to 54.08% from 63.26%. The growth in term deposits werenâ€™t matched by demand deposit (-11.74%), savings deposits (+8.64%) and other deposits (+19.89%).
We observed that power sector loans make up 51.70% of total stage 2 loans and this could be a pressure point for NPL in subsequent quarters if the liquidity challenges in the power sector do not improve. Also, we expect to see a slowdown in loan growth in the next two quarters as the bank is already on track with its loan growth target of 7.50% to 10.00% for 2019FY and the CBN’s minimum Loan to Deposit ratio of 60%, which will become effective by 9M:2019. Loan to deposit ratio currently stands at 91.09%.
Following our review of the bank’s financial performance and position as at H1:2019, we retain our 2019 outlook for the bank, as we see no significant deviation from our initial assumption. Consequently, our 2019 target P/E of 2.8x and expected 2019 EPS of NGN0.83, bringing our 2019 target price to NGN2.32. Compared to the current market price of NGN1.68 on the 3rd of September, we place a BUY rating on the stock.