FIDELITY BANK PLC:Top-line and bottom-line earnings records impressive growth

Fidelity Bank (The Bank) was incorporated as a Limited Liability Company in 1987 and commenced operations in 1988 as Fidelity Union Merchant Bank Limited. After 11 years, it leveraged on the emerging opportunities in the commercial and consumer end of financial services in Nigeria, by converting to commercial banking in 1999. It obtained universal banking license from the Central Bank of Nigeria (CBN) in February 2001. The bank quoted its shares on the Nigerian Stock Exchange (NSE) on 17 May, 2005. Fidelity Bank Plc released financial results for the halfyear ended, 30th June 2017 shows an impressive growth of 22.15% in gross earnings over the corresponding period of 2016. Profitability also grew significantly by 65.59% to N9.04 billion in the six month period ended, June 30, 2017 compared to N5.46 billion recorded in the halfyear of 2016. The Bank recently kept up with its regular dividend payment at the end of the full year 2016 as it paid a recommended dividend of N4.05 billion (on the basis of N0.14 per share) for every 50 kobo share.

INTEREST INCOME SUBSTANTIALLY IMPACTS GROSS EARNINGS

Gross earnings increased by 22.15% to N85.82 billion in the six month period ended, June 30th, 2017 compared to N70.26 billion recorded in the half-year 2016. Interest income grew by 27.80% to N72.85 billion from N57.01 billion in June 2016 spurred by substantial growth of 29.43 and 69.66% in interest from loans and advances and treasury bills available for sale respectively. The Bank’s interest expense increased by 48.02% to N38.15 billion in the half-year 2017 from N25.78 billion reported in the corresponding period of 2016. A breakdown of the components of interest expenses shows that the increase was triggered by a significant rise of 55.67% in interest expense on term deposits, 14.42% from expenses on debts issued and 256.46% in expenses on current account over the period. The growth in gross earnings was despite decline of 2.15% in non-interest income (on the back of 21.80% decline in fee and commission income) to N12.97 billion from N13.15 billion over the same period in 2016. This was primarily due to substantial decline of 83.07% on commission derived from e-banking activities indicating that the Bank can increase its non-interest income through effectiveness of various e-banking channels.

PROFITABILITY FURTHER IMPACTED BY OPERATING EXPENSES

The Bank recorded a huge increase in profit before tax (PBT) to N10.22 billion in June 2017 from N6.13 billion recorded in June 2016, representing a growth of 66.68%. Growth in PBT is due to substantial growth of 759.37% in total operating income to N3.81 from N443m and 1.77% decline in operating expenses to N30.91 billion from N31.46 billion in June 2016 reflects effective management of expenses. The management will be able to maximize shareholders value with continued expenses management and growing income in the e-banking share which offers huge potential. The Bank’s income tax expense grew by 75.52% to N1.18 in halfyear 2017 from N674m a year ago. Expectedly, profit after tax (PAT) grew by 65.59% to N9.04 billion in 2017 from N5.46 billion in the corresponding period of 2016.

NOTABLE IMPROVEMENT IN PROFITABILITY RATIO

Fidelity Bank’s assets witnessed a diffident increase of 0.81% to N1.31 trillion as at June 2017 from the figure N1.30 trillion reported as at December 2016. The caution evident in loans and advances growth is significant of the Bank’s reaction to carefully assess potential risk as the current tough and uncertain operating environment increases chances of risk occurrence. Similarly, total liabilities grew by 0.33% to N1.12 trillion as at June 2017 from N1.11 trillion as at December 2016; and a growth of 3.77% in equity over the last six months period to N192.34 billon from N185.40 billion. After-tax return on average equity (ROAE) for half-year ended, June 30th 2017 stood at 0.69% which is the same as its return on asset from 0.42% return on asset a year ago. However, After-tax return on asset (ROA) rose to 4.70% from 2.94% as at December 2016. Net profit margin rose to 10.53% from 7.77% a year ago.

RECOMMENDATION: BUY

We believe the Bank management will focus its efforts towards strengthening its income generation from financial intermediation as well as other electronic banking platforms and continue to ensure effective cost reduction in operation to enable increased profitability. Although, the Bank need to maintain an effective and reserved risk management system to enhance assets quality and mitigate increase in impairment charges during the year, nevertheless a well-managed lending facility to customers will boost its earnings. Considering the current and expected performance of Fidelity Bank going forward, we make a projected gross earning of N177.50 billion and a net income of N13 billion in the current financial year ending December 2017. This translates to a forward EPS of N0.52. Using the price to earnings multiples method of valuation, we arrive at a 6-month average target price of N1.64 for the Bank’s stock, which represents a 21.48% increase over the current stock price. We therefore recommend a BUY on the shares of Fidelity Bank Plc.

WE BELIEVE THE BANK MANAGEMENT WILL FOCUS ITS EFFORTS TOWARDS STRENGTHENING ITS INCOME GENERATION FROM FINANCIAL INTERMEDIATION AS WELL AS OTHER ELECTRONIC BANKING PLATFORMS AND CONTINUE TO ENSURE EFFECTIVE COST REDUCTION IN OPERATION TO ENABLE INCREASED PROFITABILITY