Culled—Proshare

April 10, 2017/FBNQuest Research

Event: Fidelity Bank reports Q4 2016 results

Implications: Market likely to react positively due to significant dividend yield of 16.7%

Positives: Marked reduction in loan loss provisions

Negatives: Profit before provisions -5% y/y, missed our forecast by 9%

Late on Friday of last week, the NSE published Fidelity Bank’s (Fidelity) Q4 2016 results which showed that PBT grew markedly by 422% y/y to N1.2bn. However, PAT declined by -53% y/y to N1.5bn mainly due to base effects on the tax line; an income tax charge of -N245m in Q4 2016 compared with a tax credit of N2.2bn in Q4 2015.

To a lesser extent a 28% y/y reduction in other comprehensive income (OCI) also contributed. Further up the P&L, the key drivers of the impressive y/y growth in PBT were a -61% y/y reduction in loan loss provisions and a 70% y/y increase in non-interest income.

Despite the strong y/y growth in other income, pre-provision profit declined by -5% y/y due to a -30% y/y reduction in funding income which proved more significant. Sequentially, the growth trends saw a complete reversal.

While PBT declined by -66% q/q mainly because of a -14% q/q decrease in pre-provision profits and an 8% q/q rise in opex, PAT advanced by 33% q/q, thanks to a positive result of N518m on the OCI line compared with a –N2.0bn loss in Q3 2016. Compared with our forecasts, although PBT was in line, PAT beat by 128% because of positive surprises on the tax and OCI lines.

On a full year basis, PBT declined by 21% y/y to N11.1bn due to a 50% y/y spike in provisions for loan losses and to a lesser extent a 5% y/y rise in opex. PAT declined by a much wider margin of 58% y/y, largely due to an 11.1x increase in income tax expense and a negative result of –N3.2bn on the OCI line compared with a gain of N1.7bn in 2015. Relative to our forecasts, although PBT was in line, PAT beat by 15% y/y due to positive surprises on the tax and OCI lines.

The bank has proposed a dividend per share of N0.14, which is down 13% y/y but 104% higher than the N0.07 that we had modelled. The proposed dividend implies a significant yield of 16.7%, by far the highest within our universe of coverage.

To put the size of the dividend into context, it translates to a significant payout ratio of 62.2% (vs.25.0% 2015). We had modelled a payout ratio of 35% for 2016. Although Fidelity’s results were broadly in line with expectations, we expect to see a positive reaction from the market on the back of  the considerable dividend yield.

Year to date, Fidelity Bank shares are flat compared with a -4.2% return on the index.

We rate Fidelity shares Underperform. Our estimates are under review.