November 4, 2016/FBNQuest Research

Modest cuts to our EPS forecasts and price target
Following Fidelity Bank’s (Fidelity) Q3 2016 results which showed that PBT was broadly in line with our estimate, we have made modest cuts to our 2016-17E earnings forecasts. Our price target is unchanged at N0.9.

Although the bank posted healthy growth in pre-provision profits of 14% y/y, loan loss provisions proved significant (+295% y/y) and surprised negatively by 45%. Given the heightened risk of further deterioration in the bank’s loan book, our cost-of-risk assumption of 1.6% for full year 2016E is higher than guidance of 1.5%.

Although adjustment to the capital adequacy ratio (CAR) for excess non-distributable reserves bumps up the CAR to over 18% (from a reported 16.8%), we believe the challenging operating environment will lead the bank to be more defensive going forward and keep earnings subdued. Our 2016E ROAE forecast is just 3.1%.

Even when adjusted for other comprehensive income (loss), the ROAE is still well in single-digit territory and below guidance of 10%. Fidelity Bank shares have shed -41% ytd (vs. -6% for the ASI) and are trading close to our price target. We retain our Underperform recommendation on the stock.

Weak Q3; PAT weighed down by loan impairments and OCI loss
Fidelity’s Q3 2016 results showed that while PBT declined by 14% y/y to N3.6bn, PAT fell by a wider margin of 65% y/y to N1.1bn. The greater decline in the PAT was driven by an other comprehensive income loss (OCI) of –N2.0bn which appear to be net losses on available-for-sale securities. Further up the P&L, the y/y decline in PBT was mainly driven by a significant (295% y/y) spike in provisions.

However, a 7% y/y rise in opex also contributed. Although pre-provision profits grew by 14% y/y, the negatives (on the provisions and opex lines) proved more significant. Of the two revenue lines that contributed to the growth in pre-provision profits, the non-interest income line which grew by 61% y/y was the stronger. Funding income growth was more subdued at 6% y/y.

Sequentially, the trends differed slightly from those on a y/y basis. PBT grew by 57% q/q, thanks to a 22% q/q growth in funding income and a reduction of a similar magnitude (-22% q/q) in loan loss provisions. However, PAT declined by 70% q/q due to the negative result on the OCI line. Compared with our forecasts, PBT was broadly in line (-7%) with what we were modelling. However, PAT missed by 65% due to the negative surprise in OCI.