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Need for sustaining Fidelity Bank’s NIR strong growth

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Going forward, Fidelity Bank plc needs to deepen efforts towards sustaining its Net Interest Revenue (NIR) which was improved in the first quarter of 2013, analysts have said.

Analysts say NIR remains recovery in motion for the bank, up 121 per cent year-on-year (YoY). While the NIR yield was strong at 4.6 per cent though slightly down from 4.8 per cent in full-year of 2012, it did not compensate for the margin losses on the Net Interest Income (NII) front, as gross yields dipped 180bpts to 7.4 per cent from 9.2 per cent in full-year 2012. Operating income of N17.3 billion was up by 17 per cent YoY.

Analysts at Renaissance Capital like the improvement in the bank’s NIR, which they hope can be sustained going forward.

Fidelity Bank recently published first quarter 2013 numbers. Bottom-line performance was in line with analysts expectations, but returns still low. Profit before tax and profit after tax of N5.9 billion and N4.8 billion represent 25 percent, respectively, of analysts current FY13E forecasts.

One of the analysts take away was on balance sheet that show that net loans were down 5 percent year-to-date (YtD) while deposits went up by 5 percent YtD. Thus, LDR was down to 44 percent from 48 percent in FY12. Loan penetration at 35 percent of total assets, down from 38 percent in FY12, is the lowest among the tier two banks in our coverage universe. Investment securities and interbank assets represent 47 percent of assets cumulatively, up from 44 percent in FY12. Total assets were up 3 percent YtD to N945.5 billion.

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The analysts say the bank’s first quarter 2013 numbers showed very poor trends, which they think is a reflection of the impact of lower treasury yields given the bank’s low loan penetration, and underlying funding cost pressures that continue to feed through.

“On our numbers, Net Interest Margins (NIMs) contracted 200bpts to 3.5 percent from 5.5 percent in full year 2012. We attribute this pressure to the 80bpt reduction in the bank’s asset yields to 10.9 percent from 11.7 percent in FY12, and the 110bpt rise in its cost of funds to 7.7 percent from 6.6 percent in FY12. We particularly find the funding cost trends somewhat unusual, given that deposit rates were generally lower in first quarter 2013 relative to fourth quarter 2012. What we think is that the bank may have raised fairly expensive deposits late 4Q12 which ran through the course of 1Q13. Thus, YoY, NII was down by 34 percent,” they say.

The bank’s costs were up 13 percent YoY to N11.1 billion. Given the stronger growth in revenues, CIR improved to 64 percent from 67 percent in FY12 and 66 percent in 1Q12.

On cost of risk, impairment charge of N245mn, down 66 percent YoY. Annualised, this represents 21 percent of the FY12 charge, while tax rate of 20 percent, was up from 16 percent in FY12, the analysts say.

Return on Asset (RoA) and Return on Equity (RoE) of 2 percent and 11.6 percent, respectively, compared with 2.1 percent and 11.3 percent in FY12 (1Q12: 1.8% and 9.4%, respectively).

“Overall, Fidelity Bank’s bottom-line performance was in line with our expectations, but we find the NIM trend very disappointing. We need to better understand the NIM dynamics and how this should trend through the year. Also, RoA and RoE have barely shown much of an improvement and remain significantly below our cost of equity estimate. On the positive side, we like the improvement in NIR which we hope can be sustained going forward. Its share price is up 35 percent YtD and is trading at 0.6x and 4.7x 2013E P/B and P/, respectively, which is in line with its tier 2 peer average (FCMB & Skye Bank).