Fidelity Bank’s Asset Quality Worries to Persist in H2

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Strong top-line growth, moderate impairments lift Q1’17 earnings: Gross earnings in Q1’17 grew by 18.8%, buoyed by strong performance in interest income (+24.1% YoY).

Non-interest income contracted by 11.2% YoY to N4.6 billion, as income from fees and commission moderated by 20.4% in Q1’17. Contrary to industry trends, the growth in Impairment charges was relatively flat, rising mildly by just 1.5% YoY to N0.75 billion in Q1’17.

Fidelity kept a lid on its cost as personnel expenses moderated by 16.4% YoY, resulting in a 5.8% decline in operating expenses. Consequently, after tax earnings rose by 20.5% to N4.3 billion, outperforming our estimate of N3.5 billion (+25.0 deviation) and consensus estimate of N3.4 billion (+26.5% deviation). Total asset and net asset increased marginally by 1.05 and 2.1% to N1.3 trillion and N189.2 billion respectively in Q1’17.

Etisalat exposure poses significant impairment risks: From our findings, we believe Fidelity’s exposure to Etisalat is about N17.5 billion. Given the uncertainty around the performance of the exposure, there is a possibility of higher impairment provisions in H1’17.

Thus, we project a 380% QoQ growth in impairment charges to N3.6 billion, while we expect a 25% YoY moderation in H1’17. We anticipate a growth of 11.5% and 17.3% in gross earnings and interest income to N78.5 billion and N67.1 billion respectively in H1’17.

We expect operating expenses to moderate by 5.4% to N30.0 billion, based on our expectations that the cost savings from salaries will be sustained in H1’17. In all, we anticipate a 16.1% growth in after tax earnings to N6.5 billion in H1’17 from N5.6 billion in H1’16.

For full year 2017, we expect earnings after tax to increase by 33.4% YoY to N13.0 billion. Given the constant proportion dividend pay-out (c.33% of earnings) adopted by FIDELITYBK, we expect a dividend per share of c.N0.15, translating to a dividend yield of 11.4% at current price.

We maintain a BUY rating: Using our excess return model, our TP for FIDELITYBK stands at N1.89, which translates to a 51.2% upside from the price of N1.25; thus we recommend a BUY on FIDELITYBK.

We believe at current price, FIDELITYBK is fundamentally undervalued and its outstanding dividend track record makes a compelling investment case.

However, we are cautiously optimistic in the short term as the outcome of the ongoing Etisalat exposure poses a significant risk to valuation upside given the size of Fidelity’s exposure (N17.5 billion). The stock is trading at a P/B of 0.2x which is at a significant discount to peer average of 0.4x.

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