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NNEKA ONYEALI-IKPE : TAKES OFF AFTER A DOWNTURN

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 Fidelity Bank  ended  2020 with less impressive results putting its new CEO in tight corner

 The   change of baton from  Nnamdi  Okonkwo , former  CEO of   Fidelity Bank  ,  after a stormy  financial year 2020  that  ended  with less impressive results  to   the   new management led by Nneka Onyeali-Ikpe    ,indeed, raised some serious concerns for some observers and stakeholders .   From hopes  and glimpses of  better  returns on the horizon  in   the first three quarters  of that  financial year ,the  year  ended abruptly with  deep downturn . It is, indeed, a poor starting point for   Onyeali-Ikpe   

   Overwhelmed by deleterious macroeconomic  forces  induced by Covid 19 pandemic headwinds , Fidelity Bank Plc   performance  nosedived   in the 2020 financial year  ;  its major  performance metrics  at the both the top and bottom lines  moved   sharply  southward   ; at the market level , its high level non cash earnings and unstable dividend track record impacted negatively and compounded investors’ unfriendly perceptions as the bank underperformed  both at the industry and   market levels .

     The  bank’s gross earnings  succumbed to heavy competitive and pandemic induced pressures   by 5.4%  down  to N206,204 billion in 2020  from N218, 011bilion in 2019  ;   its net income followed the same trend with  negative spillover effects  that worsened  its valuation

This affected the bottom line. After some interplay of  forces, Profit before tax (PBT) declined   from N30,353B in 2019 to N28,054 B in 2020.   . Also, its net income as it came down marginally by 6.2% to N26,650 billion compared to N28,425 B in 2019.  

  Without any doubt, the financial year 2020 was stormy; the COVID-19 pandemic put a lot of pressure on banking sector. Buffeted by the forces of macroeconomic and institutional headwinds induced by the pandemic only few players were in control of their own destiny ; the foundation of the past were shaken and fractured, the industry terrain changed shape faster than some top management could refashion its basic beliefs and assumptions. Consequently , stagnant growth, declining margins and falling market share became the industry’ s competitive challenges.

 In a situation like this , investors’ mood  is  the  best gauge of  the depth of the  bank’s misfortune  . The impacts   are  still lingering  on . First ,   investors  definitely are not happy and the signals are obvious on    its share price this year  .  The bank began the year with a share price of  N2.52   but has since lost 9.92% off that price valuation, ranking it 131st on the NSE in terms of year-to-date performance. Shareholders’ worries are further compounded by the fact that FIDELITYBK has lost 8.47% of the stock’s value from April 9 to date. 

This above may not be farfetched.    The    bank  unaudited  full year results   first released to the public raised  hope    ;  however, when  the audited results  came up  and  the figures involved contrasted sharply  with  the unaudited . Consequently, the   conflicting signals from the bank to the market raised controversy   .

 The above uninspiring performance impacted negatively on the bank’s valuation multiples . The   tier 2 bank,   returns on equity (ROE),   stood   at 11.07 %  . This is miserable as it means from every N100 .00 investors’ fund used by the bank only N11.00 is generated in return  .  The bank is traditionally not an efficient user of resources .The bank’s return on equity (post-tax) declined   to 13.3% in H1 2020 from 13.5% recorded in H1 2019. The highest return on equity of 13.5% was recorded in H1 2019 while the lowest return on equity of  6.1% was recorded in H1 2016 for the review period.

Also , measuring  Fidelity Bank profitability through its return on assets shows  it registered 1%  in 2020 .It  recorded its highest ROA  of  1.44% in 2019 while 2016 saw its lowest return on asset     ROA gives a manager and investor an idea as to how efficient a company’s management is at using its assets to generate earnings. For this bank to increase the ROA then it must try to increase the profit margin or must try to make maximum use of the company assets to increase revenues.   

Unfortunately its  performance here too is  uninspiring .   Its pretax margin  was  14%  while its  net income margin  stood at 13% .  The bank could   convert every N100.00 of its revenue   to a profit of   N13.00 only during the year under review at a post tax level   . A  measure  how much net income or profit is generated as a percentage of revenue  , its low or unimpressive level could be linked to  the inability of the management  to generate  enough profit from its  revenues  and  contain operating costs and overhead costs  .

 In terms of assets  Fidelity Bank  has a big potential to perform better if its management could wake up . It  emerged  the biggest bank by assets  among tier 2  banks  with a total assets of N 2,758,I48 b  .  A puffy assets level could indicate improved strengths in mopping up transactions, including a better position in maturity transformation- the stuff banks are best suited for. It can also mean that the bank has applied some elastic to its wings in the form of more customer touch points, branches and Point of Sale devices. For Fidelity, it was all of these and more.

 Its inability to prevail upon the above is giving the investors the opportunity to fight back .   Fidelity Bank remains less impressive wealth creator with its market capitalization of just   N74.7billion at the end of 2020 financial year . Currently, its market value has fallen toN64 billions  . This scenario may not be far to seek. Fidelity bank’s share price for 2020 was less volatile in 2020 when compared to other financial institutions. At the end of 2020, the bank’s share price increased by 15.07% .   On a year-to-date (YTD), the share price has grown 3.17% as of 8 February 2021.  All these are impressive and encouraging .

 However, the   current share price of Fidelity Bank Plc    is  N2.27. The   stock closed its last trading day  on  Monday, May 10, 2021  at  N 2.27   per share   recording a 1.34% gain over its previous closing price of  N2.24   .  The bank began the year with a share price of  N2.52   but has since lost 9.92% off that price valuation, ranking it 131st on the NSE in terms of year-to-date performance. Shareholders’ worries are further compounded by the fact that  the bank  has lost 8.47% of the stock’s value from April 9 to date.  

 The  low   percentage of the current price of a  Fidelity bank’s shares is paid as dividends on a yearly basis is  another militating against it fortune.    Dividend yield is employed as a measure of credibility and financial healthiness.

  Fidelity dividend yield at 7.75% is higher than the bottom25 % of dividend payers in the market but lower that the top 25% of dividend payers in the market 8.98%.    This in addition to  low payout of 24%  is a strong factor  behind  the weak stock of the bank .

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All the above fundamentals   continue to affect the   Investors’  expectations for future earnings growth of Fidelity Bank  shares .      Though they are willing to pay more for every one naira of its earnings ,the fundamentals are not impressive as this ratio painted    . This manifested in its   Price to Earnings ratio of 2.8 x . Some analysts  believe  this is a good value as it  indicates   investors are willing to part  with more money to acquire any extra share of its stock ;    it  Indicates   a positive future performance .though less than N3.00 per share for   of its future N1.00  earning .   However to   jumpstart its share price the bank’s fundamentals must be improved better than they are now .         

This is  also  confirmed by the value attached to the bank by investors   ; its price to book value at 0.3x indicates its share price is selling at discount  to its book value .  Comparing the price of the shares with their current book value gives investors a closer look into how the market is assessing the value of the firm. It also measures the number of times the market price of the company’s shares exceeds the book value of the business. . In the case of this bank the price is below the book value .  Its low  price earnings to growth rate at 0.2X is  also negatively  drawing down  investors  future expectations on its price to earnings   potentials 

  In the financial   year 2020 , the bank ,indeed , fought to improve  its fundamentals but not much was  achieved due to inclement operational environment  .  In its audited results a  major challenge was the dilemma of growing earnings amidst the tougher risk environment. ; as the environment  became   tougher  and more inclement   , risk taking  equally became  very dangerous  for players  in an industry  that is  coterminous with risk taking .  The year exposed the weakness of banks whose managements are  less adept in a business that is inherent in maturity transformation. 

By their fruits you shall know them; when it is said that one is a good or astute banker   ,what , in fact , is meant is that  one is a shrewd lender ,one who lends money safely and profitably .   For Fidelity Bank in 2020 , it failed this test  ; it neither lent profitably nor safely .

    During the year under review ,  poor risk management skill,  cost control knowledge and lack of creativity in its non interest income area  waged war against Fidelity bank’s  fortunes   

First  , the management of Fidelity Bank was  less tactical ; instead of taking  a route of caution  and  cut down loan-to-deposit ratio below   65%  set by regulatory authorities  as done by its rivals  ,  in 2020  this  bank’s   ratio of loan to deposit  stood at 78% .   It  was   91% in 2019  .  The implication of this is that from every N100.00 depositors’ money,   it lent out N78.00 as against N90.00 in 2019 .   Its total loans grew by 17.83% from N1.13trilion to N1.33 trillion in 2020.   

Under normal circumstances, any increase in earning assets figure should lead to more robust earnings except may the spread between interests earned and interest paid are not quite attractive .This was exactly the major challenge of  almost all banks in 2020. The challenge of a harsh environment affected their entire operations particularly with low   yield prevailing in the environment.

With low return on investments , which, no doubt ,was systemic ,an economic wide phenomenon and the general lull , occasioned by the pandemic related woes, their gross earnings were badly hit. This is what befell Fidelity  Bank. Instead of its increased earning assets to boost its earnings, the situation was opposite;  its interest income   backtracked by 4.4% .

 Moreover ,   the bank  didn’t lend  safely too    ; a whopping amount of credit loss  compounded its tale of woes   in 2020 .  .The bank suffered a credit loss of N16billion as against a reversal of N5billion in 2019 .This was a major potential spoiler that nearly put  spanners  on the impressive past records of the bank.  .During the period under review, 2020 recorded the highest percentage growth in impairment charges while 2019 recorded the highest percentage decline in impairment charges in the last few years.

 When a situation like the above takes place  in the core banking business , a good manager of a financial institution  or bank usually rev up non interest items of its balance sheet . This is because it holds  the key to stabilizing earnings especially at a time of recession and interest rate volatility .  This was not the case with Fidelity  in 2020 . Though it recorded  a  21 % growth in net interest income through a 29% Y-o-Y decline in net interest expense,   another  21% decline in noninterest income from N25,262b in 2019 to N19,853b    rubbished  the efforts of the management

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  Another   reason behind its  less impressive performance  relates to its inability to control costs     Fidelity Bank is one of the banks with high cost to income  ratio.  In spite of   a   29% Y-o-Y decline in net interest expense , 21% growth in other operating income and a 0.7 % Y-o-Y decline  in operating expense  , the  damage in the core banking business , non interest income  and  its traditional high cost to income ratio in absolute term   put pressures on the bottom line

.  Its cost to income ratio  stayed flat at 75%  approximately  between 2019 and 2020  .    The bank’s operating margin, a tool employed to analyze how profitable a business is considering its organizational structure, marketing strategies, sales strategies and current fixed expenses,  however increased marginally from 52%  to 54%  in 2020 . This indicates making 54k from  every N1.00  of its revenue .   The bank’s capacity to generate money from earning assets and non interest incomes , after all costs and expenses related to the core operations are deducted ,   improved but less impressive .   

Businesses with high  operating margin ratios  can be considered mature and their business model can be considered sustainable  while  those with low ratios   only  struggle to earn money on the operational level  and may have to go through restructuring processes in order to improve their financial situation.

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 But  the  bank has enough potentials  and could be more competitive in the hands of better management . Its  asset to equity level at  10.1 x is moderate , allowance for bad loans is sufficient at  127% ,its low risk liabilities at 68 % are made up of primarily low risk sources of funding , loan to assets ratio at 48% , loan to deposit ratio at 78% and level of bad loan at 3.8% are all indicators of its strength and brand equity..

Fidelity Bank’s Balance sheet remained well structured, diversified, and resilient with Total assets significantly increased Y-o-Y  by 30.44% from N2.11trn in 2019 to N2.76trn in 2020;     total equity grew Y-o-Y by 16.62% from N234.03bn in 2019 to N272.93bn in 2020 .

 The marketing machine of the bank, it would seem is working overtime, growing deposits; that section of the bank’s balance sheet swung up. Total deposit grew Y-o-Y by 38.67% from N1.23trn in 2019 to N1.69trn in 2020 while total loans grew by 17.83% Y-o-Y from N1.13trn in 2019 to N1.33trn in 2020 .This was to be expected from a bank which ‘focuses and channels its resources only on its core corporate and retail banking activities’, activities which require steep marketing capabilities, and in a world where IT is ubiquitous, a firm understanding of delivering tech based services.

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