FIDELITY BANK PLC: Frail earnings outlook but valuations still attractive

Fidelity Bank reported broadly flat earnings in Q1 2020, largely due to weaker Net Fee and Commission Income (-25% y/y) and double-digit growth in OPEX (up 30% y/y) which completely offset the robust growth in Net Interest Income (up 49% y/y). Annualised RoAE moderated to 9.8% in Q1 2020 compared with 12.0% in Q1 2019.

Following three consecutive years of growth in earnings (growth in EPS averaged 45% between 2017and 2019), we expect Fidelity’s earnings to weaken in 2020e. We expect pressure on Interest Income due to the low yield environment and slower growth in loan book considering subdued macro conditions, making us forecast 5% growth in loan book (compared to 3 Year average of 16%). We also expect the downward adjustment in fees on e-banking transactions and weaker trading activities due to the slowdown in economic activities to halt the growth in Net Fee and Commission Income, making us forecast Non-Interest Income of N25bn (down 13% y/y) in 2020

Despite the substantial growth in loan book in 2019 (up 33% y/y) amidst frail macro conditions, we do not envisage a significant deterioration in asset quality, as we expect management will restructure these loans particularly those in the upstream oil and gas sector. We estimate a COR of 0.55% for FY 2020e. We have revised our target price slightly downwards to N2.25/s from N2.97/s previously. However, we maintain our BUY recommendation due to attractive valuations (P/E; 1.8x and P/B; 0.2x) and the 25% upside potential based on our target price.

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