Fidelity Bank Plc: A tough 2016, but hope for the future

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Introduction

When its results are compared with those of other banks, the 2016 financial year was not exactly a great one for Fidelity Bank Plc. While it made a profit for the year, such a profit was lower than that of the preceding year, and profitability ratios were quite low. It didn’t improve on its core banking operations, recording the same level of net interest margin that it did in the prior year.

Despite this, the bank managed to dedicate a portion of its earnings to shareholders as dividend, although dividend was low when compared to other banks’ dividend.

We predict that the 2017 financial year will be a better one for the bank than 2016 was, and its quarter one unaudited results bears testament to this. Revenue was up, as was profit. If the bank maintains this momentum till the end of the year, then shareholders have a higher dividend to look forward to.

 

Core operations

Breaking from the general phenomenon in the banking industry for the 2016 financial year, Fidelity Bank recorded some form of growth in turnover for the year but was unable to sustain this growth momentum up to the bottom-line. The bank earned a revenue of N152 billion, a mere 3.5 per cent more than it did in 2015 (when revenue was N146.9 billion).

For the year, pre tax profit was N11.1 billion, and this was a 20.7 per cent decline over the level in the prior year. On the same wavelength, after tax profit declined over that of the preceding year by 30.2 per cent to end at N9.7 billion.

For the year under review, Fidelity Bank has a higher/better patronage in terms of loans, overdrafts and advances during the course of the year, pushing the bank’s loan portfolio to N718.4 billion in 2016 from N578.2 billion in the erstwhile year. Despite this, average lending rate decreased over the preceding year’s (to 17.2 per cent from 20.9 per cent).

On the other hand, deposits for the year were only slightly collectively higher than deposits in 2015 (2016: N792.9 billion, 2015: N769.6 billion). Meanwhile, average deposit interest rate decreased, but only infinitesimally, to 7.7 per cent from 7.8 per cent. This means that the bank charged its lenders a lower interest rate, and paid its depositors a slightly lower interest.

The bank’s net interest margin (which measures how effective a bank is in its core operations of lending and borrowing) was the same as it was in the prior year. Net interest margin was 50.3 per cent, same as it was in the prior year and is still indicative of effectiveness in the core business of lending and borrowing.

Earnings per share, was lower than that of the prior year, closing at 34 kobo, a 29.2 per cent decrease over the 48 kobo of 2015. Dividend also reduced to 14 kobo per share in 2016 from 16 kobo per share in the prior year.

 

Profitability ratios

Profit margin, which measures the percentage of a company’s earnings that makes it all the way to profit, was 7.3 per cent, lower than 9.5 per cent in 2015. This means that every N100 revenue earned made the bank a profit of N7.30 in 2016, lower than N9.50 in 2015.

The bank did not perform as well in terms of returns on assets (ROA) and return on equity (ROE) in 2016 as it did in 2015, indicating a regressing capacity to generate profit from assets and equity. ROA was a mere 0.86 per cent, lower and worse than 1.1 per cent before, while ROE was 5.2 per cent, also lower and worse than 7.6 per cent in 2015. Analysis shows that whole every N100 worth of assets contributed 86 kobo to pretax profit, every N100 equity developed yielded an after tax profit of N5.20. These were much lower than what other banks recorded for the same period.

Pre-tax per employee improved to N44.4 million on the average, up from N41.8 million in 2015. This is an indication of employee productivity and company efficiency.

 

Other ratios

As was the case with many other Nigerian banks for the 2016 financial year, Fidelity Bank’s capital adequacy decreased, sliding to 17.2 per cent from 19 per cent in the erstwhile year. As was also the case with other banks, the bank’s ratio is still higher than the 16 per cent rate mandated for Systemically Important Banks.

The bank recorded a much higher proportion of loans classified as non-performing in 2016 over the prior year. At 6.6 per cent, up from 4.4 per cent in the prior year, the result is now high enough to suggest a poor recovery strategy for loans. This result also overshot the regulatory threshold of 3.66 per cent.

With a debt to equity ratio of 6.0, the bank is using N6.00 of liabilities in addition to each N1.00 of stockholders equity. In other words, the bank is using N7.00 of total capital for every N1.00 of equity capital, a little higher than it did in the erstwhile year.

 

Sustainable growth

Fidelity Bank paid its shareholders a dividend of 14 kobo for every share held for its 2016 financial year. Retention ratio was 0.58, lower than 0.67 in 2015. This means that the bank retained more of its profit than it did in the prior year.

With an asset turnover rate of 0.12 times, and an assets/equity ratio of 7.0,  analysis shows that sustainable growth for 2016 was 3.6 per cent, higher than 5.1 per cent before, and this translates to mean that the bank’s growth ceiling, utilizing only its own source of funding for growth, dipped. Meanwhile, actual growth was 36.5 per cent, higher than the review year’s sustainable growth.

 

Stock value

Fidelity Bank’s stock is undervalued. Currently trading at N1.26, and it is one of the lower priced banking stocks on the NSE. As at analysis date, net assets per share was N6.40, and this was much higher than the current market price of N1.26, and indicative of overvaluation. Book value at N185.4 billion was also much higher than current market capitalisation which currently stands at N36.5 billion.

Meanwhile, the stock had favourable P.E ratio and earnings yield of 3.7 and 0.27respectively, both indicative of undervaluation.

We recommend a buy under advisement. While this stock is low-priced and regularly pays dividend, such dividend is low, and the bank’s potential for future earnings is not as high as that of some other top banks.

 

Unique strategies

Fidelity Bank began many years ago as a merchant bank. It has however been able to successfully and gradually evolve itself into a robust retail franchise.

It has successfully transformed from just a bank for corporate Nigeria into everybody’s bank. Owned largely by Nigerian citizens and corporations, it is a bank that has tailored its services to meet the needs of the Nigerian populace. These services include retail banking, e-banking, granting of loans and advances, equipment leasing, collection of deposits and money market activities.

 

Q1 result

Fidelity Bank’s unaudited results for its first quarter in 2017 shows topline growth and bottom-line growth, with revenue growing by 18.6 per cent to N40.8 billion, and pretax profit growing by 20 per cent to N4.8 billion.

Earnings per share was 15 kobo, higher than 12 kobo in the corresponding period last year. Profit margin was 11.8 per cent, just 2 basis points higher than 11.6 per cent last year. Meanwhile, net interest margin moderated to 45.9 per cent from 55.5 per cent before, meaning there was a slowdown in the bank’s core banking operations.

 

Conclusion

While 2016 was not a very good year in terms of profitability for the bank, it was not a total loss however. We expect 2017 to be better.

*Source: Fidelity Bank’s 2016 financial report

Fidelity Bank’s 2017 unaudited quarter one results

*The Nigerian Stock Exchange

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