Fidelity recently held a conference call to discuss its FY15 results. Asset quality trends were encouraging despite the NGN1.1bn 4Q15 provision made on its Oando exposure. Asset quality risks are still high going into 2016 but Fidelity’s numbers have shown significant resilience vs its tier 2 peers, most of which have announced profit warnings for FY15. We update our forecasts to reflect management’s cost cutting guidance, which is key to offsetting revenue and asset quality pressure. We raise our TP to NGN1.24 and upgrade our rating to HOLD from Sell.
NGN22.4bn Oando exposure watch-listed
According to management, 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 NGN200-250bn. Consequently, banks were directed to take additional general provisions (5% of exposure) through equity, while watch-listing the loan under CBN prudential standards. According to management, its NGN22.4bn (4% of the loan book) exposure to Oando is still performing. However, a conservative decision was made to charge the required NGN1.1bn 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 NGN1.1bn provision made, Fidelity’s FY15 CoR came in at 1%.
Margins up in 2015 but outlook weak
According to management, NIM improvement of 90 bpts YoY in FY15 was the result of loan repricing and balance sheet optimisation to higher yielding sectors; lending to the consumer sector increased to 11% in FY15 from 9% in FY14. Margins are expected to weaken in FY16, largely on the back of asset yield pressure – 10% of Fidelity’s loans are NIBOR-linked and following the decline in interest rates, loans have been repriced downwards by as much as 450bpts YtD. With no probable respite in NIR, we expect interest income to remain a key revenue driver.
Cost reduction: 5% YoY decline target
Costs were up 17% YoY in FY15 mainly due to regulatory costs and increased spend on marketing, communication and entertainment. Fidelity is guiding for a 5% YoY 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 key to offsetting anticipated revenue growth and asset quality pressure in 2016.
Raise TP to NGN1.24, upgrade to HOLD
While asset quality trends were impressive in 2015, we still have our concerns and maintain our CoR estimate at 1.7% vs management’s 1% guidance. Power and upstream oil and gas loans are management’s key asset quality concerns, and about 75% 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 7% RoE in FY16E. We raise our TP to NGN1.24 and upgrade to HOLD from Sell.
