By JULIUS ALAGBE
Fidelity Bank Plc has not hidden its intentions in the industry. With the long term strategic plan it initiated for organiic growth and stability, it has continued to march forward in newed strength and confidence.
While the industry has been experiencing some hiccups and uncertainty, the bank continues to display sterling performance and profitability. It has shown that it pays to plan ahead.
In 2019, transactions conducted by 4.7 million customers earned the financial service operator a gross income of N48.443 billion at the end of the first quarter. This represents 11.8% uptick when compared with N43.328 billion in the first quarter of 2018.
However, gross earnings weakened by 2.0% when compared with fourth quarter of 2018 as earnings size was weighed down by a 46.6% decrease in non-interest revenue. Notwithstanding, the bank profit after tax increased by 21.5% to N5.9 billion on quarterly basis, supported by a 22.5% reduction in operating expenses.
Fidelity bank raised earnings from interest yielding assets as interest income grew by 16.2% in the first quarter against fourth quarter in 2018 to N38.7 billion. This hefty performance was driven by 37.7% surge in income from Treasury Bills and 9.2% increase in income from loans & advances respectively.
Meanwhile, non-interest income slipped 46.6% quarter on quarter to N8.6 billion. This was a reflection of a decline in net foreign exchange gains to N2.3 billion; which masked the impact of 16.3% increase in net fees and commission income.
The FX revaluation gain was also 69.3% lower than the likely one-off N7.5 billion gain reported in fourth quarter in 2018. Impairment charges grew 13.1% to N1.0 billion. Notwithstanding, cost of risk remained relatively flat at 0.4% as against 0.5% at year end.
“In our view, the bank may be aiming to boost income through loan book expansion. We are, however, wary of the potential impact of this strategy on asset quality as NPL ratio for the first quarter rested at 4.9% against regulatory requirement of 5.0%”, analysts at CardinalStone Partners stated.
In the stock market, Fidelity bank is trading at less than N2 per share, but there is a recent rally as some investors and market observers are pitching tent with the bank; they say the bank is gaining much needed traction and buying sentiment is expected to be renewed.
Thus, many equity analysts and securities firms are raising sentiment, adjusting target price to capture improved fundamentals, basically growing earnings and positive macroeconomic adjustment.
In stating the obvious, Fidelity bank is lacking in strong, constant and incremental dividend payment. ARM Securities limited said on dividend payment, with no expectation of tier 2 capital raise, management plans is tomaintain its CAR with the usual capitalization of profit.
“We attempt a scenario analysis showing possible dividend payments for FY 2019 and the respective impact on the bank’s CAR”, analysts stated.
BusinessHallmark gathered that many Broadstreet junkies are also peddling that Fidelity bank is moving to becoming Tier 1 capital. Athey say anything is possible and recent moves at the bank mean there are underground disruption to be unfolded. But the question still remains, would Fidelity Bank Plc sustains the rhythm of improving business performance?
A further deep dive into its numbers shows that in the first three months in 2019, Fidelity Bank Plc`s has N1.87 trillion in total assets, having increased by 8.7% as against N1.7 trillion at the end of the financial year 2018. Meanwhile, in the first quarter of 2019, about N1.3 trillion of the assets base were earnings assets compared to N1.2 trillion at the end of financial year.
The breakdown of the trajectory shows that the bank earnings assets ballooned at growth rate of 7.7% to N1.3 trillion. But non-earnings assets grew faster at 11.2%. While interest earning assets rose 7.7%, interest bearing liabilities geared up at 6.8%.
In terms of where the bank`s revenue came from, the breakdown shows that Fidelity bank earned less from banks’ placement, Treasury Bills and Bonds in the first quarter of 2019. In other words, a move away from fixed interest rate income generating transactions.
Fidelity bank bullish when others were bearish
Recently, many banks have been unduly bearish on the economy. A large number of deposits taking banks have curtailed lending, and remain largelybearish in booking more loans since 2016. However, to close gap in their earnings, they have resortedto taking lifeline from fixed interest securities.
Fixed income market analysts told BusinesHallmark that that is fading away as yields have started moderating but it doesnt look like some banks really care. Industry tone still reflects the bearish stance as some of the banks are yet to resume lending at the end of first quarter, the results have shown.
As such, not many banks were able to grow earnings from both interest yielding assets and non-interest sources, which has been core strategy aimed at solidifying baseline performance in the short –term. However, Fidelity Bank Plc beat the odds.
ARM Securities limited noted that following it discussion with management, the firm was made to understand that on-lending arrangement with development financial institutions like BOI and NEXIM accounted for 27% of the growth recorded in the loan book over 2018.
This broadly justified the compressed net interest margin (NIM) during the period, as interest on such facilities were granted at single digits while the bank only charged guarantee fees on others.
Some analysts said that Fidelity bank has become so resilient, and building opportunities to reflate economic breathe. The management took bold step to increase loan book without jeopardising assets quality, its financial year 2018 shows. The bank closed financial year 2018 with non performing loan ratio at 5.7% as against regulators 5% bechmark. This was lower than 6.4% in 2017.
CardinalStone Partners noted that Fidelity bank was one of the few banks that grew loans in 2018 and this did not weaken the bank’s asset quality.
The analysts observed a 100 basis points improvement in cost of funds as the bank continued its drive for low-cost deposits which now account for 81% of total deposits compare to 77%. Return on equity also improved to 11.8% from 8.8% in 2017.
“Our major concerns are the bank’s weak NIM which closed at 5.8% in 2018 as against 7% in the correponding year in 2017 and high cost-to-income ratio at 71.1% in 2018 against 68.6% in the prior year”, CardinalStone stated.
Analysts at ARM Securities noted that the major challenges for the bank are its exposure to the Oil & Gas (Downstream) and Transport sector. Although, the bank has made significant provision on these exposures, we do not see much improvement given the nature of the sectors.
Hence, it forecasted absolute NPL to moderate only 1% year on year with non-performing loan ratio printing at 5.3% . It also estimated cost of risk to increase slightly by 20 bps to 0.7%. Thus, it assumptions imply an impairment charge of N6.8 billion.
In financial year 2018,
In 2018, Fidelity bank Plc grew gross earnings by 4.79% to N188.87billion, stemming from the performance of interest and non-interest income. The bank’s asset yield weakend by 2.3%.However, to offset the decline in asset yield it experienced, the bank built up its earnings asset base, which translated into higher interest incomes and transactional fees.
Meristem Securities reckoned that it acknowledged its retail banking effort at growing individual loans and in 2019, as the bank aims to introduce three (3) additional retail products.
The Securities firm said it expected this to increase individual loans and generate higher returns given its inherent risk. With its retail strategy alongside its intention to increase earning assets, analysts then projected a 10.59% and 9.61% increase in interest income and non-interest income, leading to an 8.56% growth in gross earnings.
Asides building loans through its retail strategy, loans increased partly due to a change in FOREX translation rate from an average of the CBN official and NAFEX rate to the NIFEX rate. Management was also able to improve its liquidity ratio to 39% and loan to deposit ratio to 73.10% as against 84.70% in 2017 through deposit growth, especially low-cost deposit.
The bank`s cost of fund improved to 6.20% at the end of financial year 2018 as against 7.20% in 2017. However, net interest margin fell to 5.8% from 7% in 2017 due to a 2.3% drop in average yield on earning assets.
“In 2019, management’s target of 6% – 6.5%, is based on its ability to drive the cost of funds lower and increase earnings yield from broadening its risk asset mix and we believe this is attainable, Meristem noted.
With the adoption of IFRS 9, the bank took an additional equity charge of N28.4billion. However, this didn’t deplete Tier 1 capital as the bank wrote this off through its risk reserves. Consequently, CAR stands at 16.70%, bolstered by earnings recapitalization.
In 2017, management centered on improving the quality of its assets, especially overdraft, on which it took an additional provision of N9.69bilion. In the period, the benefit of this decision emerged; hence, cost of risk and non-perfomig loan ratio improved to 0.50% and 5.70% apiece, bringing impairment charges to N4.22billion, its lowest since 2011.
Meristem Securities noted that in 2019, its analysts do not expect the bank to sustain this low level as it envisaged that the increase in individual loans, will drive cost of risk higher. Hence, the Securities firm projected a 43.03% increase in impairment charges.