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Published On: Mon, May 14th, 2018

The spreadsheet…Fidelity Bank tackles economic headwinds



First quarter (Q1) 2018 results for Fidelity bank, according to analysts, has been far from investors dreams but it has also not been a bad run, as the bank’s net interest income (a measure of progress in its core lending business) rose by a modest 2.5 percent.  The trouble seems to be that gross earnings figures have been stalled by a slow-moving economy which in 2017 rose by a paltry 1.9 percent compared to neighbouring Ghana’s sizzling 7.5 percent.

International Monetary Fund (IMF) projections for gross domestic output (GDP) for Nigeria in 2018 suggest that the economy will do only marginally better than the previous year by shuffling ahead at a leisurely 2.1 per cent only to fall back to 1.9 per cent in 2019. ‘’if you were a betting person’’, notes Arinola Aroyewun of Core Capital, ‘’the odds are that net banking sector incomes would generally rise by less than 10 per cent in 2018, the omens for a strong economy and big income leaps are zilch’’.

Given the economic background to the sector in 2018, Fidelity Bank’s soft profit numbers for the quarter are understandable despite the helpful fall in the bank’s loan impairment figures. Loan impairment fell from N750million in 2016 to N702million in 2017, a drop of 6.4 percent year-on-year (Y-o-Y). Nevertheless, the bank’s net interest income after impairment charges rose mildly by 2.9 percent from N4.85billion in 2016 to N4.98billion in 2017. According to Aroyewun, ‘’the bank is firing bullets but they are rubber not lead, investors would like to see more gut and guile over the coming months’’.  The banks’ management seems to understand the challenge.

In a recent, first quarter, interview with Business Hallmark, the banks Chairman, Mr Ernest Ebi, noted that ‘’like other banks we got caught on the wrong side of a recession. It was not for lack of trying but virtually all banks had their earnings squeezed by slow economic growth and struggling business capacities. Right across industries times have been very hard’’. But Ebi pointed out that, ‘we have recognized the disruption recession has caused to industry-wide bottom lines and we have clearly identified the needed responses. For example, digitization will be a major part of the forward service architecture of the bank, and value innovation will continuously enable us to see and respond to emergent needs in the not-too-distant horizon’’.

This perspective may be critical to Fidelity’s health as a financial service provider. The bank’s asset quality remains amongst the best in the industry with the ratio of impairment charges outstanding loans and advances remaining at 0.1 percent in both Q1 2017 and Q1 2018. The Q1 2018 balance sheet data shows that impairment charges have been kept within low margins.  But that is not to say that a few big-ticket transactions have not been fairly sticky.  Exposure to the energy and oil and gas sectors has posed their unique challenges but the bank’s loan distribution has been roughly balanced enough to ease the overall riskiness of the asset side of the bank’s balance sheet. Fidelity’s Q1 2018 figures indicate that the bank’s liquidity has improved sizably enough. The money lenders loans –to- customer deposit ratio dipped -5.5 percent from 0.91 in Q1 2017 to 0.86 in Q1 2018. This means that the bank has experienced an improved capacity to meet loan requests from customers. Equally important, the bank’s cash and cash balances with the central bank (CBN) rose 38.6 percent, from N219billion in Q1 2017 to N303.4billion in Q1 2018. The clincher for optimism concerning its liquidity year-on-year is the rise in its operating cash flow which rose from N22.7billion in the first quarter of 2017 to N122.2billion in the contemporary period of 2018, a thumping 438 percent increase over the twelve month period. Supporting the liquidity story is the bank’s strong free cash flow figure which rose from a negative of N2billion in Q1 2017 to a meaty positive net cash flow of around N76billion after adjusting for capital expenditure.  Tolu Delano, former head of investment, Royal Exchange Assurance (REAN) and immediate past chief executive of Abuja Leasing Company concedes that Fidelity bank, ‘’has great liquidity numbers, but you must also be mindful of the fact that keeping cash comes at a massive carrying cost, so efficiency would require careful asset creation which is just as important as clever cash management’’. He further notes that ‘’shareholders spooked about liquidity are also worried about dividends; as with many things in life the matter is one of balance’’.

Fidelity actually increased the proportion of loans and advances to its total assets despite the overall slow movement in credit in the last one year. The banks’ loans as a proportion of total assets rose from 43 percent in Q1 2017 to 50 percent in Q1 2018. However, cash and balances with the central bank (CBN) rose from a soft 13 percent in 2017 to a steep 21 percent in the recent contemporary quarter. The banks management apparently retraced its steps from lending to other financial institutions (amounts due from banks as a proportion of assets were 26 percent in Q1 2017) and stashed up on less risky (even if more expensive) cash or near cash items (amounts due from other banks buckled to a puny 7 percent by Q1 2018).

When it comes to leverage (borrowed money relative to the banks equity), the retail lender seems to have done a tidy job of keeping its nose clean and its mind untroubled by repayment worries; borrowed funds as a proportion of the bank’s total equity capital was a tolerable 1.9 in Q1 2017 and a lower (which counter-intuitively means, stronger) 1.8 in Q1 2018. According to Delano, ‘’the bank has, at least in the first quarter of the year, kept a tight ship. Profit may not have soared, but overall stability of the bank’s balance sheet looks pretty good’’.

However, analysts note that the banks equity capital took an unexpected knock between Q1 2017 and Q1 2018 mainly as a result of a N15billion fall in the bank’s non-distributable reserves which, nevertheless to some extent, was watered down by the accretion in the bank’s statutory reserves which went up by 11.6 percent from N24.5billion in Q1 2017 to 27.3billion in Q1 2018. The fall in reserves increased the fragility of the banks’ debt to equity ratio, but for most analysts, a debt to equity ratio of 7 times would still be acceptable for large money centre deposit institutions with large loan portfolios and customer deposits.

With the IMF/World Bank’s rather grey predictions for GDP growth for Nigeria in 2018, Fidelity Banks profit figures may not be stunning, but they will be decent. Business Hallmark’s In-house business models indicate a year-end 2018 profit after tax of N20.2 billion; this would be 6.9 percent higher than the N18.9billion posted in 2017. Admittedly this is nowhere near the fascinating 93.7 percent leap from N9.7billion to N18.9 billion between 2016 and 2017(astonishingly at the heart of a recent recession), but that counter recessionary performance was more of a one-off foreign currency windfall than from the normal run of business.

According to Core Capital’s Aroyewun, ‘’Fidelity might see a slow year in 2018, but so will other banks. What is critical at the moment is not earning pace but earnings quality, as long as loans and advances are repaid in a stable manner and banks cover operational costs steadily and predictably, paradise is not lost. Indeed, banks over the next few years will begin to see the pearly gates of business growth open wider’’. Maybe so, but in the meantime, Fidelity Bank will grit its teeth and continue what its Chairman Ebi calls, ‘valuation innovation’, perhaps the only way to wrestle economic headwinds.

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