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FIDELITY BANK PLC: Admirable franchise momentum

FIDELITYBK’s market share has greatly benefited from aggressive multiyear balance sheet growth initiatives. For context, the Bank’s share of total assets—within analysts banking coverage ex ETI—has accelerated by a 5-year CAGR of c.24.3% to c.6.3%. This strategy, combined with regular asset reallocation campaigns and monetary hawkishness, has allowed the bank to 1) increase liquidity through an increasingly low-cost funding mix (CASA stock now 83.1% vs the prior 3-year average of 76.1% , 2) strengthen credit creation (3-year CAGR: 21.3%), and 3) optimise bottom-line expansion (4-year CGAR: 15.8%). Moreso, the company’s business profile will likely be further buoyed by the imminent acquisition of Union Bank UK Plc, which could boost service ecosystem while exploiting cross-border financing channels.

In FY’23, analysts believe profitability will continue to improve on tightening monetary environment, enhanced asset quality, and better fee-based income. While future rate hikes could further trouble the domestic business terrain, analysts are encouraged by FIDELITYBK’s bolstered capacity to generate interest-earning assets whilst mitigating credit impairments (stage 3 ratio now at 2.7% vs FY’21: 2.9%). Furthermore, analysts estimate non-interest income to advance by a 15.0% CAGR over analysts 5-year analysts forecast horizon, largely driven by sustained digital income momentum. Despite the fee income growth, see scope for muted NIR-II ratios (5-year average: 10.9%), per the historically constrained contribution from the Bank’s capital market activities.

To this end, analysts are wary of the bank’s earnings sustainability on account of a seemingly unchanging monoline focus and inadequate diversification.Notwithstanding the rapid credit risk growth on account of aggressive loan booking, analysts adjudge the bank’s capital buffers (CAR: 19.8%) to be adequate by Basel III standards. Adjustments to our model result in target price of N4.72 (vs N3.59 previously). Analysts upward TP review reflects a capture of the bank’s continuing expansion in interest earning assets, improving ability to maximise benefits from changes in the yield environment and dividend payout potential. Analysts also project a potential 2.0 ppts increase in ROCE over our forecast horizon. However, given recent rally in the stock’s price, analysts TP translates to SELL recommendation

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