August 5, 2016/FBNQuest Research
Maintaining Underperform rating despite rolling over to 2017E
Although Fidelity Bank’s (Fidelity) Q2 2016 PAT beat our forecast by 27%, the positive surprise was solely due to a positive result on the other comprehensive income (OCI) line.
The underlying results showed that PBT missed our forecast by a considerable margin (-36%) due to a negative surprise in loan impairment charges. Consequently, we have cut our PBT forecast by -7% on average over the 2016-17E period. Fidelity’s management guided to a 2016E cost-of-risk of 1.5% due to increased provisioning in H2 2016.
However, our cost-of-risk assumption of 1.6% is slightly worse than guidance due to heightened risks of NPL formation as a result of the tough operating environment and the deterioration of most macro-economic indicators.
As such, our 2016 ROAE forecast of 4.5% is well below the 10% that management is guiding to. Although the shares have shed -28% ytd (vs. -4.0% ASI), we find them expensive on a risk-reward basis. A current levels, the shares imply a potential downside of -13.3%.
Consequently, we retain our Underperform recommendation on the stock.
Q2 PBT down 54% y/y, driven by steep rise in impairment charges
Fidelity’s Q2 2016 results 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 is related to the devaluation of the naira.
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.