Last week, Fidelity Bank Plc. (Fidelity) released its unaudited H1 2016 numbers with gross earnings sliding 3.5% YoY to N68.3 billion while PBT and PAT declined 35% and 31% YoY to N6.2 billion and N5.5 billion respectively. A 53% jump in impairment provisioning to N4.8 billion is at the heart of the drop in H1 16 earnings. Relative to our estimates the H1 16 numbers are largely in line, with the exception of impairment charges.

  • Macro pressures driving asset quality deterioration: In contrast to the muted start to 2016, when impairment charges contracted 28% QoQ, Fidelity reported a five-fold QoQ (+91% YoY) surge in provisions to N4.1 billion with annualized cost of risk rising 200bps QoQ to 2.3% (H1 16: 1.3%). The development fits a pattern across our coverage of rising provisioning and reflects underlying deterioration in loan quality.
  • NGN depreciation inflates line items: In line with a theme across banks to have released thus far, the impact of 43% naira depreciation in Q2 16 was evident across line items with Fidelity reporting 20% QoQ (YoY) increase in net loans to N711 billion. (Adjusted for the currency weakness, we estimate that net loans only rose 3% QoQ).  In a similar vein FX translation largely accounts for all of the quarter’s deposit growth (adjusted for FX impact, deposits shrank 5% QoQ by our estimates.)
  •  Cost control provides little respite to asset quality pain: In response to soft loan growth and mounting asset quality issues, Fidelity responded by trimming down on funding costs which declined to a twenty quarter low of 4.6%. The improvement reflects better mix with term funding shrinking 14% QoQ resulting in share of deposits sliding 7pps to 28.4%. In addition, in line with management guidance of cost optimization, opex shrank 2.3% QoQ leading to a 5.6pps QoQ cutback in cost-to-income ratio to 71%.
  • Persistent asset quality issues soften outlook: Whilst we await management commentary on the source of the surge in Q2 16 provisions, the current run rate of loan loss charges and prospect of increased delinquencies in upstream O&G, power and consumer loans result in upward revisions to our cost of risk assumptions to 2% (+20bps higher than prior) vs management FY 16E guidance of 1%. Cumulative impact of these adjustments drive a moderation in FY 16E earnings (PBT: -21% YoY, PAT: -33% YoY) and in our FVE for the stock to N1.10 (from N1.45).
  • Though Fidelity currently trades at discount on a P/E (3.1x vs. peer mean at 8x) and P/B (0.2x vs peer mean at 0.8x) basis, the prospects for higher provisioning leads us to downgrade our rating on the stock to a SELL from previous BUY.
  • Fidelity is hosting a conference call on the August 3rd 2016.

Source: ARM

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