How far can Fidelity bank Plc go this year?

What buy side analysts won't tell you. Uncensored, objective!

The banking sector’s terminal decline in profitability may hit harder in 2015 as economic environment becomes tense. The Central Bank of Nigeria tight fist on activities at the foreign exchange market with constant adjustment to net open position and 72 hours holding periods could impact earnings if it stays.

As a customer, is your money safe with the bank? Yes. As an investor, is your return on investment optimize? No!

Wonderfully, analysts said that the banking sector price-earnings ratios are robust and expect market to pick up in not too long. Given Fidelity bank Plc previous performance, how far can the deposit money bank go this year?

According to market data, Fidelity bank share is trading among lowest price-earnings ratios class on the bourse, currently selling below N1.50 per share. It earnings per share is not also eyes-catching. The stock has been on downward slope as market breath contrast. On itself, the bank stock is not doing so well.

For Fidelity, the slope may not be a rubber band waiting to shoot forward until fundamentals changes. For the bank, there is need to improve on profit and re-defined its businesses. A case of guess wrong and lose big for investors.

Meanwhile, there are more opportunities for Fidelity bank, but the discovery process is slow. “Fidelity bank is yet to identify more investment opportunities due to low research commitments to taking position in the emerging economies. There are areas of banking it has not fully explored”, Analysts said.

Unlike in the oil market, where market force through artificially induce rivalry is forcing down prices, regulatory cutback is forcing down profitability in the industry apart from rising cost.

Then, that does not mean some banks balance sheet sizes are not growing. As tense as it is, we still have blue-ocean strategists weathering the storm in the banking sector.

As banks will be releasing their full year result soon; I do not think that the market is expecting any surprise. Earnings season has failed to upturn market from drooling last year.

We are looking forward to seeing about 10% growths in Fidelity Bank revenue for 2014. Pre-tax profit won’t come strong too but post tax earnings is expected to enjoy reduced tax effect as the bank target tax rate to be between 10% – 15% base on amendment tax rebate on government securities and tax credit on syndicated loans.

To support the revenue forecast, we saw that earnings came in strong from first quarter of year 2014 to the third quarter. The bank raked up N30.955 billion in the first quarter, it moved up its earnings for the second quarter to N32.303 billion, a bubbly of 4.22% and it climbed marginally to N32.765 billion at the end of the third quarter.

Going by this, it is anticipated that Fidelity would come in strong in its fourth quarter earnings release as well.

Though, the bank recorded higher revenues and total loans while deposits continued to exhibit growth. But, higher operating expenses and increased provision for loan losses were its downside in 2014 not to mention beyond.

Its net income dropped by more than 136% from N18.2 billion in 2012 to N7.7 billion in 2013 due to increased operating cost. In its full year 2014, net income is expected to be moderated as it increased exposure to oil and gas by 99.8% within a year.

Broadstreet consensus may rather look more robust but the fact that the bank has been moving on a thin line for awhile would support this argument on the top line growth projection.

Expanded assets, moderated profit

Earning assets accounted for about 70% of the bank’s total assets while non-earning assets represent less than 30%. The growth in assets came in on the back of about 798% increase in bank placement.

That indicates that significant proportion of earnings asset was allocated low yield business. In the result, Naira denominated customers loans grew by 6.4% from N300 billion to N319 billion while foreign currency denominated loans rose sharply by more 52% to N170 billion.

Suffice to say that given the fact that the bank will be expecting loan services and capital payment in foreign currency, perhaps dollar, it will enjoy improve spread from upside in exchange rate. This will be erased if the bank has an obligation as well in greenhorns.

For its full year result, Fidelity bank is expected to come in strong in term of loan growth, beating its 15% target. Not so much is expected in profitability as its operating expenses trend up.

The bank’s gross earnings grew up by 6.1% to N96 billion at the end of the 9 months of the financial year 2014 from N90.5 billion in the equivalent period 2013. The component analysis of the bank’s gross earnings showed a significant improvement in interest income from loans.

Interest income from loan grew up from 46.1% it contributed to earnings at the end of third quarter 2013 to 53.8% in the equivalent period 2014. However, interest income from investment in securities was low due to negative financial market movement.

Net interest income went up significantly by 42.6% to N36.7 billion from N25.7 billion. The growth in net interest income was achieved on the back of 18.9% increase in net loans and advances to customers as well as better pricing of assets. The bank may do as much as 60% growth but this may still not impact positively on its pre-tax profit.

Credit impaired charges nosedived by more than 35% to N1.9 billion from N2.9 billion in the comparable period. At the end of FY 2013, the bank reported a sum of N7.6 billion impaired credit. From the look of things, it appears that the bank is paying attention to managing “busted loans and advances”.

Operating expenses ascended by 13.9% from N35.6 billion to N40.6 billion. In the period, the major drivers of the bank operating expenses were regulatory cost which jumped to N6.578 billion at the end of 9 months 2014 from N4.849 billion in comparable period in 2013.

At the bottom line, profit before tax (PBT) dropped by 2% from N13.7 billion to N13.4billion while profit after consideration for current tax liabilities increased marginally from N11.1 billion to N11.2 billion.

Total customers deposit moved up miniscule to N811 billion from N806 billion at the end of the financial year 2013. Though, deposit mix has been appropriately placed as ratio of cheap deposit to total customers improved from 57.6% in 9 months 2013 result to 62.1% at the end of 9 months 2014.

Though Fidelity bank reported decent revenue growth quarter on quarter in 2014, we expect top-line headwinds to persist, given the protracted economic recovery.

Moreover, high interest rate environment would keep the banks margins under pressure because of lack of business. With the thrust of banking regulations, there will be pressure on fees and loan growth.

Analysts believe that in the long term, investors will not be disappointed with their investment in Fidelity as it has capacity to grow.

Going forward, we believe that strategic acquisitions as much as it is need won’t be available in short term to expand the bank business and boost profitability. To grow, more investment is needed in business research and discovery processes.