Fidelity Bankís (Fidelity) FY 2018 results showed that Gross Earnings grew 4.8% y/y to N188.8bn, well above our FY 2018 estimate of N182.1bn.
Focus on the company’s profit
Pre-tax Profit also increased 31% y/y to N25.0bn, even though it came below our 2018 estimate of N27.9 billion. This was mainly due to the higher than expected increase in the company’s Operating Expenses.
The bank reclassified FY 2017 numbers by moving N3.3bn from Interest & Similar Income to Net gains from financial assets at fair value through profit/loss. This accounts for why those two line items missing our estimates.
Interest Income grew 4.2% y/y to N153.7bn, driven by income from treasury bills and other investment securities (+8% y/y to N35.7bn) amid the marginal decline in income from Loans and Advances (-0.1% y/y). On the other hand, Interest Expense rose 6.1% y/y to N84.1bn in FY 2018 owing largely to the increase in the interest paid on debts issued as well as other borrowed funds (+35%y/y).
Notwithstanding, cost of funds declined to 6.2% in FY 2018 (FY 2017; 7.2%) as the bank continued to replace expensive term deposits with savings deposits. Consequently, Net Interest income grew marginally, up 2.1% y/y to N69.6bn in FY 2018 (FY 2017; N68.1bn). Net Interest Margin however came in at 5.8% (FY 2017; 7.0%) on account of lower yields on earning asset despite the decline in funding costs.
Net Fee and Commission Income
Further down the income statement, the firm recorded an impressive growth of 17.2% y/y to N17.1bn in Net Fee and Commission Income on the back of higher account maintenance charges (+11% y/y to N2.8bn), commission on travellersí cheque and foreign bills (+36% y/y to N2.6bn) and Commission on E-banking activities (+62% y/y to N2.8bn). This underscores the bankís retail strategy, which involves the use of technology in delivering exceptional banking services.
In line with our expectation, Impairment charges declined significantly by 63% y/y to N4.2bn. Consequently, cost of risk declined by 93bps to 0.5%, which is below our 2018 cost of risk estimate of 0.7%. Similarly, NPL ratio improved to 5.7% from 6.4% in FY 2017.
FIDELITY FY 2018
Buoyed by the marked decline in loan loss provisions amid the marginal growth of 1.3% y/y in other Operating Income, Operating Income grew 4.3% y/y to N101.4bn. Notably, this is the first year that the firm will record Operating Income above N100bn. We view this as a positive development and remain cautiously optimistic that it will be sustained going forward.
Operating Expenses however grew by 8.0% y/y to N72.7bn. The higher growth in Operating Expense when compared to the growth in Operating Income (+4.3% y/y) led to a 249bps increase in cost to income ratio ex-provisions to 71.1% from 68.6% in FY 2017, which was well above our 2018 estimate of 66.6%.The bankís Capital adequacy ratio (CAR) improved to 16.7% (FY 2017: 16%), which is above the regulatory requirement of 15%.
Overall, Pre-tax Profit grew by 31% y/y to N25.1bn (FY 2017; N19.2bn) while Profit after tax grew 29% y/y to N22.9bn, albeit the slower growth in PAT was due to the higher effective tax rate of 8.6% compared to 7.5% in FY 2017. EPS came in at N0.79 in FY 2018 compared to No.61 in FY 2017. RoAE also improved to 11.8% compared to 8.8% in FY 2017.
The company proposed a final dividend of N0.11/s in 2018, same as in FY 2017 subject to approval at the AGM. Based on its last closing price of N2.26 on 28 March 2019, this translates to a dividend yield of 4.8%.
We have a target price of N2.81/s for Fidelity with a Buy recommendation.
CSL STOCKBROKERS LIMITED CSL Stockbrokers,
Member of the Nigerian Stock Exchange,
First City Plaza, 44 Marina,
PO Box 9117,