May 24, 2021/Proshare

by FBNQuest Research

Material cuts to our FY ’21f EPS forecasts and price target

Fidelity Bank’s Q1 ’21 PBT beat our forecasts soundly. However, PAT missed because of a negative result of -NGN18.7bn in other comprehensive income (OCI) – due to fair value adjustments made to bond securities following the rise in yields. Relative to our forecasts, the beat on the PBT line was mainly underpinned by positive surprises in funding income and loan loss provisions. Consequently, we have increased our FY ’21 funding income forecast by 15%.

We have also lowered our cost of risk assumption by 100bps to 0.9%. Despite these upward revisions, we have cut our FY ’21 EPS forecast by c. -31% because of the negative result in OCI. Our new price target of NGN2.74 is also around c.-36% lower. Although our new forecasts translate to a FY ’21 PBT growth of 41% y/y to NGN39.7bn, they imply a -62% decline in EPS to NGN0.59 because the negative OCI of c.-NGN19bn now features in our forecasts. On the back of these forecasts, we expect Fidelity’s ’21f ROAE to decline to c.6.1% from c.17.8% in ’20.

As such, we see significant downside risk to the bank’s FY ’21 ROAE guidance of 12.2%. With respect to capital adequacy, we had expected that Fidelity’s capital buffers would be enhanced considerably (to c. 20%) by the NGN42bn tier-II bond that the bank issued in January 2021. However, its CAR moved by just 20bps to 18.4% because of fair value and regulatory adjustments to capital and a sharp increase in credit risk that accompanied strong loan growth (of +8% q/q).

On a positive note, Fidelity’s asset quality (NPL) ratio declined by 20bps q/q to 3.6%. On a relative basis, the bank’s shares trade on ’21f P/B multiple of 0.2x for 9.8% ROAE in ’22f or a considerable discount to the 0.6x multiple for 14.6% ROAE that the sector is trading on. Our new price target implies a potential upside of 20% from current levels. We keep our Neutral rating on the shares.

Mixed Q1 ’21 results after a disappointing Q4

Fidelity’s Q1 ’21 results were mixed. Although PBT grew 54% y/y to NGN10.1bn, the bank reported an after-tax loss of -NGN9.1bn because of a negative result of NGN18.7bn in OCI. The double-digit PBT growth was driven by a 17% y/y expansion in funding income – thanks to a  -26% y/y reduction in interest expense and a -40% y/y reduction in loan loss provisions. In Q4 ’20, PBT and PAT both fell by over -30% y/y because loan loss provisions spiked to -NGN5.8bn, compared with writebacks of NGN449m in Q4 ’19.