By Folakemi Emem-Akpan
Our analysis of Fidelity Bank’s recent financial reports shows that 2015 was a profitable year for the bank, but not as profitable as 2014 was. While it earned more income during the year, profit margins were lower and investor compensation smaller. The Bank however, made it a point to reward shareholders with a dividend, although this was significantly lower than what they got in 2014.
The bank enjoys tremendous goodwill, but this is not exactly evident in the valuation of its stock. It is currently undervalued, and is exchanging for less than it should on the floor of the Nigerian Stock Exchange.
For its investors and shareholders however, the 2016 financial year does not seem to be shaping up as well as the 2015 did, if its third quarter results is anything to go by. So investors should expect an even lower dividend, if any at all, come end 2016.
As was the trend in the banking industry for the 2015 financial year, clients patronised Fidelity Bank a little more in matters regarding loans and advances. The bank’s loan portfolio increased by 6.7 per cent to N578.2 billion. Average lending rate increased over the preceding year’s, as did its average deposit interest rate. So while it charged its lenders more, it also paid its depositors a better interest.
Net interest margin, the true test of a bank’s effectiveness in its core banking operations of lending and borrowing, improved to 50.3 per cent in 2015 from 46.9 per cent in 2014 and 35.7 per cent in 2013. The improved net interest margin is a positive reflection of this effectiveness.
The bank’s gross earnings (which comprises interest income and other fees and commissions) increased to N146.9 billion. Such gross earnings showed 7.9 per cent improvement over the preceding year’s N136.1 billion level.
The growth in turnover, slight as it is, however did not make it all the way to the bottom-line. After-tax profit grew by only 0.7 per cent to N13.9 billion. The bank’s Chairman, Christopher Ezeh, says even the 0.7 per cent growth shows resilience on the bank’s part despite the slowdown in the Nigerian economy.
Earnings per share, at 48 kobo, was as at the same level as the preceding year’s. Meanwhile, dividend per share decreased to 16 kobo from 18 kobo in 2014.
As previously mentioned, Fidelity Bank’s slightly higher turnover intersected with lower profits, and as such its profitability ratios dipped in 2015. First to record a regression was the profit margin of the company, dipping to 9.5 per cent in 2015 from 11.4 per cent in 2014. What this means is that for every N100 earned by the bank in the course of the year, only N9.50 made it to the profit position, as compared to N11.40 for the year preceding 2015.
Assets deployed also earned less in 2015 than it did in 2014. Return on assets (ROA) for the year stood at 1.1 per cent in 2015, as compared to 1.3 per cent in 2014.
For the 2015 financial year, Fidelity Bank deployed equity valued at N183.5 billion and for every N100 equity deployed, the bank made an after-tax profit of N7.60, a slight decline from the profit of N8.00 made in 2014.
During the course of the year, the number of employees in its employ decreased to 3,511 from 3,397. It seems the increase in employee number paid off because, earnings per employee improved to N41.8 million on the average, up from N40.1 million in 2014. This is an indication of employee productivity and company efficiency.
The proportion of the bank’s loans classified as non-performing in the course of the year was 4.4 per cent, same as 4.4 per cent in 2014. This is on the high side and therefore among the poor ones in the banking industry.
In terms of capital adequacy, Fidelity Bank did not perform better in 2015 than it did in 2014, as its result for the year was a little lower than the preceding year’s. Its equity (a company’s primary and cheapest source of funding) could finance about 31.7 per cent of the loans and advances it gave out to borrowers, down from 32.0 per cent recorded in the erstwhile year.
Having a debt to equity ratio of 5.7 shows that the bank is using N5.70 of liabilities in addition to each N1.00 of stockholders equity. In other words, the bank is using N5.70 of total capital for every N1.00 of equity capital. A little high but still within acceptable limits, it also matches what was normal in the banking industry in 2015.
For the review year, the company had a profit of N13.9 billion, and it retained 67 per cent of it. It retained more profit in 2015 than it did in 2014 and paid less dividend.
Asset turnover for the year was 0.12 times while assets/equity was 6.7 times.
In 2015, the bank’s actual growth (growth of income), at 5.1 per cent was below its sustainable growth 7.9 per cent), suggesting that the company grew below its growth ceiling. Simply put, it did not achieve its inherent capacity for growth.
This was the same scenario as in 2014, when at 5.6 per cent, sustainable growth was also lower than actual growth (7.2 per cent), indicative of a company operating at a higher level than its true possibilities.
As at December 2 2016, Fidelity Bank’s stock traded at 88 kobo, and it was one of the cheapest in the banking subsector of the Nigerian Stock Exchange. Our analysis shows that the stock is grossly undervalued at this price. Not only did its price fall below sector average as at analysis date, it has also a low earnings yield of 0.54 and price earning ratio of 1.83 as at same date. The combination of these figures gives the investor a basic understanding of how wealthy the company is for the investor, and the fact that the stock is undervalued currently in the market.
Other indices also support this undervaluation theory. For example, the bank had a book value of N183.5 billion and a market capitalisation of N25.4 billion, putting its book value/market cap ratio at 7.3. Traditionally, a book to market value ratio of more than one is an indication of undervaluation.
Available results from Fidelity Bank’s third quarter performance shows a gross earnings of N110.3 billion, up by a mere 3.0 per cent from the level recorded in the corresponding period of 2015. Profit after tax fell by as much as 23.7 per cent to N8.7 billion.
As at third quarter, the bank presented an earnings per share of 30 kobo, which is also a decline over the 39 kobo it presented in the prior year. Profit margin was also worse. All things being equal, these unaudited results point to a worse showing come full year end 2016. Investors and shareholders should expect to receive an even smaller dividend than they did in 2014.
Fidelity Bank began in the 1990s 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.
The bank is slightly unsteady on its feet right now, but this unsteadiness is currently a general banking industry phenomenon, brought on by negative macroeconomic developments. From results available so far, it seems the bank might not be able to make much profit for its 2016 financial year as well.