Fidelity Bank Beats Expectations

Unlike its peers, Fidelity Bank outperformed market expectations, writes Goddy Egene

The performance of Fidelity Bank Plc for the year ended December 31, 2015 came to many capital market stakeholders as a surprise. The bank performed above the expectations of many. Although the bank recorded a marginal growth in profit after tax (PAT), it was a better result compared to profit warning that was announced by some its peers.

2015 results
According to the audited results of the bank, gross earnings grew from N136.9 billion to in 2014 to N146.9 billion in 2015. Profit before tax (PBT) declined by 9.6 per cent to N14.0 billion from N15.5 billion in 2014, while PAT settled at N13.9 billion compared with N13.8 billion the previous year. Hence, the directors recommended a dividend of N4.6 billion, thus maintaining a tradition of consistent dividend pay-out for the past six years.

Total equity increased by 6.0 per cent to N183.5 billion from N173.1 billion in 2014 full year, net operating income stood at N83.9 billion, a moderate 12.5 per cent rise from N74.6 billion in 2014 full year, growing the major income lines across the quarters.

A further analysis of the bank’s performance showed its fourth quarter was particularly impressive particularly   in terms of income generation, which accounted for 27.4 per cent of the gross earnings for the full year. The bank’s gross earnings grew to N146 billion on the back of 16.2 per cent stronger performance recorded in interest income for the year. Interest income grew by from N104.3 billion to N121 billion.

Fidelity Bank recorded significant jump in interest income in the last quarter of 2015 due to its aggressiveness in growing loans and advances, which rose from N610 billion to N658 billion in 2014. Interest expense  grew at a slower pace to interest income by 8.7 per cent  due to 6.7 per cent moderation in total deposits, that fell from N820 billion to N769 billion. Consequently, interest margin  improved from 5.4 per cent  to 6.1 per cent.

MD explains performance
Commenting on the performance, Chief Executive Officer, Fidelity Bank Plc, Nnamdi Okonkwo said that it reflected the disciplined execution of the management’s medium term strategy and the resilience of evolving business models despite the extremely challenging business environment in 2015. He explained that the bank improved the earning capacity of its balance sheet even in the face of decline in fee income precipitated by a N10.0 billion reduction in its foreign exchange income.

“We continued to increase yields on earning assets faster than the growth in funding costs which improved our Net Interest Margin (NIM) to 6.9 per cent in 2015. In spite of the strong double digit growth of 12.5 per cent in net operating income, PBT declined by 9.6 per cent largely due to two critical factors: the 17.1 per cent increase in total expenses due to strategic investments and cost incurred in 2015 to position the business for further growth in line with our aspirations. The increase in impairments due to a more prudent approach adopted with respect to a special regulatory provision which was charged directly to the Profit and Loss (P&L) was responsible for the decline in profit,”Okonkwo said.

He said PBT declined by 9.6 per cent largely due to two critical factors, which are the 17.1 per cent increase in total expenses due to strategic investments and cost incurred in 2015 to position the business for further growth in line with our aspirations. “The increase in impairments due to a more prudent approach adopted with respect to a special regulatory provision which was charged directly to the Profit and Loss (P&L) was also responsible for the decline.”

 Okonkwo explained that the decline was due to the implementation of the Treasury Single Account (TSA), adding that the disciplined execution of the bank’s retail strategy continued to deliver strong results as savings deposits grew by 22 per cent.

“Our non-performing loan (NPL) ratio remained constant at 4.4 per cent while our regulatory ratios remained well above the set thresholds, our capital adequacy ratio at 19 per cent gives us ample leverage to take advantage of emerging business opportunities”, Okonkwo he said.

Looking forward, the CEO said the bank would focus on redesigning its systems and processes to enhance service delivery, disclosing plans to embark on cost optimisation initiatives aimed at reducing expenses by  five per cent.

“The bank will also adopt proactive risk management strategies, increase customer adoption/migration to its digital platforms and grow its retail banking market share,” he assured.
The board of directors of the Bank said it is offering investors 16 kobo per share dividend for the period ended December 31, 2015. The Bank says the 16 kobo dividend is payable to shareholders whose names appear on the Bank’s register as at the close of business on April 18 to April 22, 2016, while the annual general meeting (AGM) and payment date is May 5, 2016. The lender said the 16 kobo per ordinary share of 50 kobo each amounts to N4.6 billion and this is subject to Withholding Tax at the appropriate tax rate, which will be deducted before payment.

Analysts’ Assessment
Assessing the performance of the bank, analysts at Renaissance Capital said
Fidelity’s numbers have shown significant resilience vs its tier two peers, most of which have announced profit warnings for  2015.

N22.4bn Oando exposure watch-listed
Fidelity said that  following the significant losses declared by Oando Plc in 2015, the CBN has been concerned about implications for the banking sector, given cumulative loan exposure to the sector of N200 billion to N250 billion. As a result, banks were directed to take additional general provisions (five per cent of exposure) through equity, while watch-listing the loan under CBN prudential standards.

According to management, its N22.4 billion (four per cent of the loan book) exposure to Oando is still performing. However, a conservative decision was made to charge the required N1.1 billion general provision to its P&L in 4Q15 given the loan weight. “Material discussions between banks are under way with respect to meeting a CBN deadline on how proceeds arising from the divestment of Oando’s downstream operations will be used to offset loans among other restructuring terms. Even with the N1.1 billion provision made, Fidelity’s FY15 CoR came in at 1.0 per cent,” Rencap said.

Cost reduction targeted
Costs were up 17 per cent in FY15 mainly due to regulatory costs and increased spend on marketing, communication and entertainment.
“Fidelity is guiding for a five cost decline as management does not expect one-off litigation and corporate finance costs to reoccur in FY16. We factor this in while noting that delivery on this will be the key to offsetting anticipated revenue growth and asset quality pressure in 2016, the analysts said.

Upgrade Rating
RenCap noted that while asset quality trends were impressive in 2015, they still have their concerns and maintain our CoR estimate at 1.7 per cent versus management’s 1.0 per cent guidance.

“Power and upstream oil and gas loans are management’s key asset quality concerns, and about 75 per cent of the upstream oil and gas book to four names is currently being restructured, with a breakeven price of $35/bl and tenor extensions of 12-24 months. Significant asset quality deterioration in these sectors, present a key risk to our numbers. On our revised estimates, the stock is trading at 0.2x FY16E P/B and we are modelling for seven per cent RoE in FY16E. We raise our target price to N1.24 and upgrade to HOLD from Sell,” they said.