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Published On: Mon, May 15th, 2017

Nnamdi Okonkwo: Beyond the numbers

…dreams and ambition of the Fidelity Supremo

By TESLIM SHITTA-BEY
Nnamdi Okonkwo is not the usual suspect. His flair for banking is as passionate as his taste for books. Strategy for him is as important as a bottle of beer is to a drunkard on a midnight binge. This undeniably explains why Fidelity Bank is pushing into market spaces that have kept competitors gazing warily at his next set of moves. By numbers the Bank has been a phenomenal success. In the first quarter (Q1) of 2017 the bank saw gross earnings fly from N34.4billion in 2016 to N40.8 billion in 2017, a rise of 18.6 per cent year on year; as gross earnings took a leap to the clouds, profit after tax equally soared 20.5 per cent year on year rising from N3.58 billion in Q1 2016 to N4.32billion in Q1 2017. ‘The bank is one of those quiet turnaround stories you get to hear by chance but get to admire by performance’ says Mike Ayandeji, Investment boss of Corporate Banking outfit Capital Assets &Finance.

Ayandeji observes that 20 years ago Fidelity was Nigeria’s principal ‘go to’ institution for trade and transport finance. It was to the banking sector of the 1990’s what Shoprite is to Nigeria’s shopping natives today. He notes that virtually all major interstate bus companies in the country at the time drove to the bank to hustle up loans to fund their regional operations. This he recalls was the era of Nebolisah Arah (or ‘Nebo’ as he was fondly called). ‘He was the totem of the bank; he was a chap with a mind as swift as a whippet and a nose as sharp as a bloodhound, his transaction acumen was legendary’. But even geniuses have moments of poor performance; slightly before the banking wizard’s era came to an end there were signs of stress on the banks balance sheet as the banks extensive exposure to non performing assets had begun to take a toll on its loan loss provisions as earnings took a bashing. Nebo’s era ended just at the turn of the millennium (2003) and slightly before the Chukwuma Soludo (Central Bank governor) sandstorm swept several banks down very dark alleys. ‘The fact that Fidelity held up smartly against the Soludo hurricane of 2005 and survived the Sanusi cyclone of 2009 indicates that the institution has, over time, cultivated an intrinsic operating resilience to be respected’ Ayandeji insists.

This maybe so, but the bank has still had to survive on clever marketing and crafted strategy to stabilize operations, a move crafted by Okonkwo. For example, between 2012 and 2016 the bank’s net interest income (a measure of its strength and underlying profitability) rose from N36.8 billion in 2012 to N61.9 billion in 2016, representing a five year growth of 68.2 per cent or 9.1 per cent on a compound annual basis. But between 2012 and 2013 the bank’s net interest spread suddenly took a nasty turn plunging 16.3 per cent from N36.8 billion in 2012 to N30.8 billion in 2013. A lot of the problem was attributed to the slowing down of credit growth and the persistent rise in costs of deposits which came mainly from corporate and public sector sources. When Okonkwo came in as chief executive he needed a plan and a team, be came up with both.

Cranking up the growth machine

By 2014 (the year Nnamdi Okonkwo took over management of the bank as chief executive) the new crew of managers decided to change strategy. Management deliberately scaled down corporate and public sector deposit liabilities and began to intensify expansion into the retail end of the market. The consequence was a steady but significant reduction in the bank’s cost of deposits and a hefty heave in its interest income. Net interest income rose from N30.8 billion in 2013 to N48.8 billion in 2014 or what amounted to a spectacular year on year leap of 58.4 per cent. From 2014 to 2016 net interest income went up by a further 26.8 per cent rising from N48.8 billion to N61.9 billion. For the first quarter of 2017 the rise in net interest income before impairment charges has been much milder rising from N16.1 billion in Q1 2016 to N16.6 billion in Q1 2017, a modest lunge of 3.1 per cent. Nevertheless, it is clear that the Okonkwo retail onslaught has begun with dire consequences; not necessarily for the bank itself, but for a close rival with similar niche considerations. Diamond Bank, Fidelity’s closest regional rival, has already started feeling the pressure as Fidelity sucks customers away from its banking halls.

A sizeable chunk of Diamond Banks customer base comes from the eastern part of the country or from individuals of that region. This has positioned it within the crosshairs of Fidelity Banks renewed competitive strategy of increasing market share. The two banks are, therefore, in a tight contest to win the hearts and souls of a crowd of traders and business executives of Ibo origin. Outcome of the battle so far has been mixed, but there are indications that Fidelity continues to make inroads into this market space as is its rival forces a push back. Fidelity’s deposit liabilities dropped disappointingly from N820 billion in 2014 to N769.4 billion in 2015, a year that was admittedly deviously difficult for virtually all the banks. But the retails boys and girls at Fidelity have more recently gone to the streets and are literally dragging up deposits as the banks liabilities rebounded in 2016 to N793 billion or 3 per cent higher than the previous year (see figure 1). Customer deposits in Q1 2017 rose 2 per cent above that of Q1 2016 from N784.5 billion in Q1 2016 to N800.2 billion in Q1 2017, suggesting that the forward drive for cheaper deposit liabilities is under way, albeit rather slowly. The bank’s assets have equally pulled ahead, even if, sluggishly. The banks total assets has surged mildly from N1.19 billion in 2014 when the new management came in place to N1.23 billion in 2016, a slight 3.4 per cent nudge. Nevertheless, over the last five years the bank’s total assets have grown by a jolly 41.97 per cent (see figure 2).

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Iron pressing costs

With Fidelity’s gross earnings held back by a slow motion economy (national output (GDP) is expected to grow by a mere 1.7 per cent in 2017), the bank may need to curtail operating expenses. To keep profits healthy analysts note that the bank must push forward with the thinning down of interest costs and other administrative expenses. Fast-paced gross earnings growth is highly unlikely in 2017 as manufacturers and consumers are only gradually beginning to stir back to life. Indeed the 2017 budget has just been passed by the national assembly (NASS) last week and, therefore, government spending is unlikely to affect major economic sectors until Q4 of the year.

Well enough, Fidelity Bank’s operating expenses so far have been modest; the banks operating expense to gross earnings ratio (a measure of its operating efficiency) climbed slightly between 2015 and 2016 from 22.5 per cent in 2015 to 23.5 per cent in 2016, a tolerable growth given foreign exchange declines and rising domestic inflation (estimated at 17.8 per cent) . Ensuring that its cost of operation does not exceed a quarter of its gross annual earnings will be critical in years ahead as the bank battles to improve profit margins (pre-tax profit margin plunged from 9.5 per cent in 2015 to 7.3 per cent in 2016). The cost war seems to be alive and well as the bank presses down on operating expenses; its Q1 2017 results show that operating expenses slid 11.9 per cent from N16 billion in Q1 2016 to N14.3 billion in Q1 2017. Okonkwo’s corporate pressing iron seems to be in fine condition.

 

Risk assets: all about the quality

A nagging problem for Nigerian banks appears to be their liquidity or the ability of the banks to meet cash or near cash requests on demand. The problem was pervasive between 2003 and 2004 and reemerged between 2008 and 2009 just after the global financial meltdown. However in the last half decade most banks appear quite comfortable. No major liquidity challenge has been announced but there are signs that a number of second tier institutions are barely holding up appearances as they painfully look for ways to quietly recapitalize their businesses. Fortunately Fidelity Bank still has liquid juice to power its activities.

A major reason why banks have found themselves in a liquidity rut has been the quality of their risk assets or loans which have become exceptionally sticky; borrowers cramped by recession have found themselves incapable of repaying loans in line with the original terms of their borrowing agreements. Fidelity bank’s impairment provisions against its customer loans outstanding took a nasty dip from 10.53 per cent in 2015 to 8.62 per cent in 2016. The bank is still having a crushing time beating down its poor credits as borrowers continue to squirm under the twin challenges of dwindling consumer demand and rising manufacturing costs. Analysts have expressed the opinion that If the Okonkwo-led management (as it appears to be doing) cuts back the toxic parts of its short term loan assets a little further, a reduction in loan impairment charges could see the bank’s projected profit and loss accounts spike appreciably. ‘The Okonkwo crew is doing a great job, but the harsh times still require tougher measures than we have seen so far. Nonperforming loans (NLP’s) are going to have to be reeled in as net interest incomes get pulled wider by lower deposit costs. The truth is these are times that try men’s souls and also their corporate bottom lines’ Contends Uzoma Ibeabuchi, portfolio manager at local investment house, Cantor Asset &Trust.

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Ibeabuchi points out that, ‘Fidelity has done brilliantly in the first quarter of 2017 by increasing loans to customers from N590 billion in Q1 2016 to N730 billion in Q1 2017, this is equal to an upside growth in lending of about 24 per cent, but of greater importance is the fact that the bank’s impairment provisions rose by only 1.5 per cent, showing a major improvement in asset quality. The bank’s loan quality seems to be up and that should put it in good stead to see earnings per share (EPS) soar by year end’ says Ibeabuchi.

Looking forward

Business Hallmarks in-house spreadsheet model indicates that Fidelity Bank would likely grow earnings per share this year by a further 17.6 per cent from 34 kobo in 2016 to 40 kobo in 2017. If investors assume a price earnings multiple (P/E) of 4, then the banks yearend potential price may land at a comfortable range of between N1.20 and N1.60. This should yield a capital appreciation opportunity of 22.4 per cent based on a recent price of 98 kobo, given a recent inflation rate of 17.9 per cent, real yield (without adjusting for an indicative dividend yield of 11.7 per cent) would perhaps be five per cent, total yield would be in the neighbourhood of 16.2 per cent.

But even Okonkwo realizes that Fidelity has to push beyond the immediate figures to fashion out a strategy that would sustain its earnings growth in years to come while pushing down loan loss charges. This may require a bit of reconfiguration of its lending portfolio and a strategic withdrawal from credit to a few hitherto prime industries. The bank may also need to widen its deposit base and attract a more diverse composition of businesses by geography and ethnicity. Of the three banks that have strong brand recognition and patronage by Nigerians from the east it still remains the smallest by asset and deposit size (it trails both Zenith and Diamond Banks). The good thing going for it is that unlike Diamond bank that is tasked to dig itself out of profitability ditch (Diamond Banks Q1 profit before tax in 2017 slipped -16.4 per cent from N6.7 billion in Q1 2016 to N5.6 billion in Q1 2017), Fidelity bank has been able to keep profit growing. To continue to do this it must increase market loan share (operational spread may not increase much further) and push for lower cost retail deposits. In addition it must keep a firm fist over operating expenses other than interest costs.

So far Okonkwo has kept the bank on the straight and narrow, but he must equally be wary of getting involved in any further politically exposed transactions that could ruin both his personal reputation and that of his bank. The 2016 trouble the bank faced concerning its alleged funneling of state petroleum corporation (NNPC) dollars to national electoral officers for the purpose of influencing the outcome of the 2015 elections could have proved deadly. The uproar associated with the spotty business could have broken customer confidence and lead to a run on the institution.

Nevertheless, the bank appears to have weathered that particularly nasty storm and should be prepared to take on the strategic imperative of growth. It has all the key elements it needs. What Okonkwo and his tribe of managers need now is to show courage and character. Fidelity’s supremo is well on his way to cutting new paths for the bank, but dreams and reality bleed together along the same path, one which involves punishingly hard work. Indeed, stakeholders of the bank expect nothing less.

 

 

 

 

 

 

 

 

 

Source: Audited accounts, Fidelity Bank Plc

 

Okokonkwo resumes as MD

Source: Audited accounts, Fidelity Bank Plc

 

 

 

 

 

 

Source: Audited Fidelity Bank account 2016

 Source: Audited Fidelity Bank account 2015

 

 

Q1 2017 (N’m)
Fidelity Bank Diamond Bank
Gross earnings                     40,842                             212,400
Net interest income                     16,557                                31,456
Profit before tax                       4,849                                  5,584
Total assets               1,310,854 2,075,269
Total deposits                  800,147                          1,435,735
Shareholders’ funds                  189,214                       232,354.00
Earnings per share (Q1 2017) N0.15  N0.18
Price earnings ratio (recent)  2.73X  9.08X
Dividend yield (indicative) 14.14%
Share price N0.99 N1.00
Beta 1.435                                  1.985

 

 

 

 

 

 

 

 

 

 

Source: Unaudited Q1 accounts of the banks

 

Source: Fidelity Bank audited accounts, 2017f represents Business Hallmark projections

 

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