September 23, 2021/Proshare
by FBNQuest Research
Material upward revision to our price target following rollover to FY ’22f
Fidelity’s H1 ’21 PAT of NGN19.3bn is tracking ahead of management’s implied H1 guidance of NGN15-16bn, and implies an annualised ROAE (pre-OCI) of 14.2% vs. guidance of 12.2%. Q2 ’21 pre-provision profit missed our forecast because of a negative surprise in funding income, largely driven by lower yields on earnings assets (mainly liquid assets). Nonetheless, PBT beat our forecast soundly because of positive surprises in loan loss provisions and opex.
Consequently, we have cut our FY ’21 funding income forecast by -8%. Following the positive surprises in loan loss provisions and opex, we have lowered our cost-of-risk assumption by 200bps to 0.7% and our opex forecast by -6%. These revisions underpin the +38% increase to our ’21f EPS forecast.
However, our new price target of NGN4.54 is 66% higher because we have rolled forward our DDM valuation to FY ’22. Looking ahead, we expect a more positive outlook for funding income as asset yields benefit from loan book repricing and a slight uptick in yields on government securities compared with Q1 levels. We are also encouraged by the bank’s robust performance in digital banking. The segment’s revenue was up 49% y/y in H1 ’21. On a relative basis, the bank is trading on a ’21f P/B multiple of 0.2x for 9.9% ROAE (post-OCI) in FY ’22f. These compare with an average multiple of 0.9x for 13.2% FY ’22 ROAE that MSCI EM banks are trading on. Year-to-date, Fidelity shares have shed -4.4%, vs the -3.5% return on the NSE ASI.
Our new price target implies a potential upside of 88% from current levels. Nevertheless, we keep our Neutral rating on the shares because we see other banks with more favourable risk-adjusted potential returns elsewhere within our coverage universe.
Q2 PBT up 95% y/y
Q2 PBT and PAT grew 95% y/y and 79% y/y to NGN10.5bn and NGN9.7bn respectively. The key drivers were reductions of -82% y/y and -24% y/y in loan loss provisions and opex. However, in stark contrast to the gains on the cost lines, the revenue lines disappointed. Funding income fell -9% y/y, mainly due to a 23% y/y rise in interest expense, mostly driven by a sharp rise in term deposits which were up 33% q/q. Non-interest income also declined by c. 26% y/y, primarily because of a -NGN5.0bn loss on the fixed income trading book. Total comprehensive income advanced 3% y/y, benefitting strongly from a positive result of NGN5.6bn in other comprehensive income.