Fidelity Bank Rated Buy on Strong Earnings Expectation
Fidelity Bank Plc has seen buckets of buy ratings after its relatively healthy earnings performance in the first half of the financial year 2022. The bank is in the process of raising capital after management announced the acquisition of100% equity stake in Union Bank UK.
The bank which eyes Tier-1 capital banking class break a key record by declaring a 10 kobo per share interim dividend for the first time in its dividend payments history despite a lower capital adequacy ratio.
In an equity report, investment firm, Meristem Securities estimated a profit of N59 billion for Fidelity bank Plc in 2022 with the hope that Tier-2 lender earnings will gross N318.90 billion.
In the first half of 2022, Fidelity bank reported that its gross earnings grew 37.88% year on year to N154.84 billion, attributed to an improved loan appetite. Analysts at Meristem Securities said in an equity report the topline growth seen in the period is the highest half-year number in at least five years.
They noted that the impressive growth in topline was spurred by both interest and non-interest income. Its financial statement showed that income from interest-yielding assets jumped 52.86% amidst the monetary authority’s hawkish stance.
Meristem said the increase in interest income was largely driven by improved yields on earning assets which popped 11.50% in H1:2022 from 9.40% in H1:2021. There was also a 14.90% expansion in interest-earning assets from the beginning of the year to date, according to analysts’ notes.
According to analysts, the bank’s asset yield was higher due to an increase in both returns on investment securities, up 10.10% in H1:2022 as against 6.00% in H1:2021. This was also supported by a 12% increase in the average lending rate in the first half of 2022 compared with 10.50% in the comparable period in 2021.
For non-funded income, analysts said the growth came from a rise in fees-based income where the bank saw 26.39% year-on-year growth and net gains from financial instruments, which more than doubled in the period.
During the review period, digital banking income accounted for about 48% of net fee income compared with 24% contribution made to earnings bucket in H1:2021. Meristem Securities analyst attributed to double-digit growth rate in both transaction volume and value.
With the changes in market dynamics, the alteration in the interest rate environment plus worsening price level, the bank’s operating expenses spiked year on year. Fidelity bank’s operating expenses rose significantly with additional pressure from an increased regulatory cost.
For context, AMCON and NDIC charges accounted for about 36% of the bank’s operating expenses in the first half of 2022 as its balance sheet expanded. Despite the company’s effective tax rate increasing to 6.10% from 5.24% in H1:2021, according to Meristem Securities review, Fidelity bank’s profit for the period grew to N27.29 billion.
It is noted that a lower non-performing loan ratio and higher earning asset yield are positive for the bank. On the other hand, Fidelity bank faces higher cost-to-income ratio and lower capital adequacy ratio challenges.
“We expect the improved yield environment and increased digital channels usage to support earnings. Thus, our gross earnings and PAT forecast for 2022 are N318.90 billion and N59.09 billion, respectively”, Meristem stated.
# Fidelity Bank Rated Buy after First Time Interim Dividend#