Culled—Proshare

August 1, 2016/FBNQuest Research

Event: Fidelity Bank reports Q2 2016 results

Implications: Negative reaction by the market likely

Positives: Limited

Negatives: Loan loss provisions grew markedly and surprised negatively, leading to PBT falling -54% y/y

Fidelity Bank’s Q2 2016 results which were last week Friday showed that while PAT of N3.8bn fell -10% y/y, PBT saw a much greater decline of -54% y/y. The former was helped by a positive result of N1.8bn on the other comprehensive income line which we suspect is related to the devaluation of the naira i.e. unrealised gains on net fx positions.

The main driver behind the marked fall in PBT were loan loss provisions which grew by 92% y/y to N4.1bn (a growth of 5% y/y in opex played a modest part too). Profit before provisions came in flattish at N22.0bn. In terms of the contributions of the two income lines, non-interest income was weaker, declining -15% y/y and offsetting a growth of 7% y/y in funding income.

Sequentially, PAT was up significantly from a depressed N71m in Q1 2016 (weighed down by a negative other comprehensive income result). In contrast, PBT was down -44% q/q, reflecting the steep rise (+449% q/q in this case) on the provisions line. Again the provisions line offset a better performance on the profit before provisions line (+5.7% q/q).

Compared with our estimates, the underlying results missed by some magnitude. PBT came in 36% lower than we were expecting. However, PAT surprised positively by 27% because of the N1.8bn other comprehensive income. We forecasted zero for that line. Again, it was the provisions line that led to the yawning gap between our forecast and what was reported. Our provisions estimate of N1.7bn was significantly below the N4.1bn that the bank reported.

We were concerned that tier 2 banks such as Fidelity were likely to struggle in the current economic climate in Nigeria because we felt they were sub-scale, relatively inefficient and with generally weaker asset quality ratios.

In some instances we have been positively surprised that gains on fx helped cushion the negative impact of the deteriorating macro environment: the 30%+ devaluation of the naira has ended up being a net positive for these banks.

In Fidelity’s case, however, there was no such material gain recorded, leaving the weak underlying results exposed. We continue to expect the bank to struggle as we move into H2; the natural response to the challenging environment is to be defensive. We expect this to lead to some market share loss to the larger and more robust tier 1 banks.

Year to date, Fidelity has lost -18%, worse than the ASI’s -2.2%. We would expect further losses going forward once the market starts to focus on the fact that the underlying results were below expectations. We rate Fidelity shares Underperform. Our estimates are under review.

Fidelity Bank Q2 2016 results: actual vs. FBNQuest Research estimates (N millions)