CardinalStone Partners made an upgrade to Fidelity Bank earnings as the Tier-2 capital lender reduce its funding cost by almost 300% from 7.2% amidst struggle for low cost deposit base.
Similarly, due a decline in operating cost, the bank’s cost to income ratio went down, creating room for an improved margin. Some investment analysts however told MarketForces Africa that second quarter of 2020 will set direction for Fidelity Bank earnings outturn for 2021.
One key word that defines banking sector in the recent time is caution due to high default risk induced by the outbreak of covid-19 pandemic.
Fidelity Bank Earnings Projected to Increase as Costs Tumble
Nneka Onyeali-Ikpe, Fidelity Bank Chief Executive
In the financial service sector, Fidelity Bank has been bullish on lending. The bank has been actively strong with on-lending facilities for developmental purposes.
In an industry report, CardinalStone Partners recognised improvement in the bank’s earnings profile, resulting to rating upgrade from hold to buy.
According to CardinalStone, Fidelity Bank get a raise as the lender continue to be pushing through the barriers amidst regulatory and tepid economic growth performance.
“We raise our profit before tax forecast for Fidelity Bank to N33.3 billion and upgrade our recommendation to BUY from HOLD”, equity analysts at CardinalStone said.
Analysts said they like the consistency in the bank’s strategy following the appointment of a new Chief Executive Officer –without drama.
While many lenders have become so conservative in booking credits due to surge in non-performing loan resulting to steep rise in impairment charge, Fidelity Bank comfortably expanded its book in the first quarter of 2021.
At 7.3%, CardinalStone analysts said the bank recorded the strongest Q1-2021 loan growth among its coverage universe, despite the broad slowdown across the sector.
It was noted that average loan growth in the banking space during this period was 3.1%, representing a rather bearish stance when compare with average loan growth of 5.2% in Q4-2020.
Furthermore, CardinalStone elaborated that gains from a drastic reduction in cost of funds have proven critical to uplifting bottom line and, analysts believe, this could linger through financial year 2021.
“For context, the bank’s cost of funds has crept to a low of 2.5% in Q1-2021 from as high as 7.2% and 6.3% in 20018 and 2019, respectively”, CardinalStone elucidates on lender’s effort to get its cost profile in order.
Bouncing Back After a Tough Year
2020 was a tough year for Fidelity Bank. The bank’s topline was dragged by all revenue streams, said equity analysts at Meristem Securities Limited in a report.
Unlike most of the other lenders, analysts specifically noted that Fidelity Bank Plc.’s earnings took a hit from the pandemic-induced storm with almost all income lines posting negative growth.
Contractions in both interest income and non-interest income saw to the 5.42% year on year decline in gross earnings, reported at NGN206.20 billion.
Meristem Securities concluded that a combination of factors was responsible for the decline in interest income, despite the 26.50% increase in interest earning assets to NGN2.058 trillion. As expected, the low yield environment adversely impacted income from investment securities.
Similarly, the reduction of interest on the Central Bank’s intervention funds had a negative effect on interest income, as about 23% of the bank’s risky assets are funded by intervention funds.
Furthermore, analysts said the regulatory reduction of transaction charges induced the 21.41% year on year decline in fee related income.
Consequently, the bank’s non-interest income went south by 11.21%. An improvement in the yield environment as well as Management’s indication of the possibility of loan repricing should redirect interest income northward in 2021, Meristem Securities explained.
Also, it added that growth in transaction volumes across the bank’s digital channels should bode well for fee related income in the current year.
“We therefore anticipate a 11.86% rebound in gross earnings to NGN230.67 billion for 2021”, equity analysts at Meristem Securities Limited forecasted.
Profitability Suppressed by Impairment Charges
The pandemic-induced economic stress impacted Fidelity Bank’s loan assets as management booked a higher impairment charge on credit losses.
While yield on assets reduced by 290 basis points to 10.70%, cost of funds benefitted from both the low yield environment, moderated 270 basis points to 3.60%, even though interest bearing liabilities increased sharply, up 32.72% year on year to NGN1.959 trillion.
The bank’s net interest margin thus, recorded a marginal uptick to 6.30% from 6.20% in 2019 while analysts said they like the modest increase in operating expenses by only 2.00%, in spite of the inflationary pressure in the economy.
More so, Meristem Securities believes the increase in operating expenses was mainly due to increase in regulatory overheads.
The decline in the bank’s operating expenses actually contributed to the 830.44 basis points drop in cost-to-income ratio which fell to 65.06% from 73.37% in 2019. Meanwhile, operating income rose faster at 15.02% than costs.
Nevertheless, bottom line was dragged by sky-high growth of 418.56% in credit loss provisioning for risky assets as profit after tax shed 6.24% to NGN26.65 billion.
Fidelity Bank indicated that the bank would strengthen its digital channels and agent banking footprint, with a view to accumulating low-cost deposits going forward.
Meristem Securities analysts said they expect this to further suppress funding costs, which would have a pass-through effect to increase profitability.
“In addition, we expect the improved business environment to reduce the tide of impairment, which is also promising for profitability in 2021”, analysts said.
Mixed Performance in Asset Quality
Meristem Securities said 18.27% increase in the bank’s gross loans to NGN1.393 trillion was partly attributable to the impact of currency devaluation.
“While the uptick in non-performing loan (NPL) ratio to 3.81% from 3.28% in 2019 gives us some concern, we like the reduction in stage 2 loans to 18.90% of gross loans from 21.78% in 2019, despite the restructuring of about 35% of loan book during the year”.
Looking ahead, the investment firm foresees an improvement in NPL ratio in 2021, as sectors which contributed the most to the NPLs in 2020 -Transportation and General Commerce- are beginning to witness improvements.
“We also take comfort in the bank’s high NPL coverage ratio of 139.30% and adequate Capital Adequacy Ratio of 18.20%”, analysts said.
At 37.80%, the bank’s liquidity ratio is well above regulatory minimum, notwithstanding its high effective cash reserve ratio of 31.79%.