Fidelity Bank Q3,2023: On The Verge Of Tripple-Digit Profitability.

Well known for its ingenuity and audacity, Fidelity Bank’s   performance is a harbinger of a juicier outing in the 2023 financial year.

With the release of the  first nine months  result for 2023, Fidelity Bank has shown clearly where it is headed, powering its way to the top, spiking its balance sheet size making a steady move to the big time, ramping up returns and taming costs as well as leading in regulatory requirements.

In the period under review, its gross Earnings grew by 60.7% yoy to N388.8bn from N241.9bn in 9M 2022; its net profit hit N89.16b billion from N34.96b, an increase of 155.0% on the back of healthy earning assets, fast rising fees and commissions. In all, the bottom line reflects a sustained upswing in revenue and some slowdown in costs through the year. There is no doubt about it, the much awaited triple digit profit is already on the horizon, very imminent. At the full year, Fidelity is sure to hit that milestone.

CHALLENGES, THREATS AND OPPORTUNITIES

The above brilliant performance was achieved in spite of a highly challenging operating environment .In the period under review, the Nigerian Bankosphere is paved with many challenges and threats that set the industry for failure just as the terrain is equally littered with opportunities.

First, the prevailing high high interest rate environment presented a huge potential to increase the players’ interest income.

However, the skyrocketing inflation was counterbalanced by a highly rising cost of operations. Also, the prevailing fragile economic set the players against potential loan payment default, leaving them with the option of high provisioning tendency.

Naturally, a challenge before any player in this industry is that its profitability depends on the source of its investible funds and costs relative to the amount deployed as loans as well as its yields . This is critical as the main source of income and profitability of banking remains  the spread or the difference between the rates at which the funds are borrowed and the rate at which they are invested or loaned out . Also, the capability of a bank on managing risks—the risk of mismatches between assets and liabilities and between borrowing and lending rates determines its profitability.

Only a bank that could put in place a robust and better fund transfer pricing ,a method used by bankers to evaluate the profitability of deposits and loans is sure of outperforming others in this industry.

While the above is about the challenges in interest income segment, the key challenge in the non interest income segment is about the volume of transactions just as the trading segment depends on the skill set deployed by the treasury desk of such a bank. Trading income is the most volatile form of bank revenue. Even a record of consistent profit trading over a long period is no guarantee of future losses arising out of market corrections or simply making the wrong bet on financial markets.

The management of Fidelity Bank is not oblivious of the above challenges and threats confronting it from its operating environment .However , the above impressive exploits of Fidelity Bank in the first nine months of the current financial year could be traced to its management ability to respond to the competing pressures and changes in the business environment  ,its strategic capability which include its  resources and competences as well as its ability to  prevail on cultural and political contexts under the creative and visionary leadership led by Mrs. Nneka Onyeali-Ikpe,

COMPETITIVE RESOURCE BASE

The starting point of Fidelity Bank’s successful strategies is the acquisition, retention and development of resources. Its total assets rose significantly by 35.7% from N3.99tr to N5.04trillion in last nine months while shareholders funds hit N411b from N314b, an increase of 30.7%

The rationale behind its drive to fortify itself with competitive assets may not be farfetched. Size is a source of competitive advantages. Large companies are essential to the wealth creation process for a number of reasons  First, having a capacity to match the resources and global distribution of large competitors brings advantages. Also, large companies also tend to devote a disproportionate share of their resources to training and education. Moreover, it opens  the door to many of tomorrow’s mega-opportunities will require significant resources. Also, the fortunes of large companies include their potential to generate significant employment.  But it is not unconnected to grow the bank and hit the tier 1 circle.

Fidelity Bank ,without any argument, has continued to build a competitive and robust balanced sheet with total assets and equity base that is highly strong and diversified.

The size of a bank’s assets serves as an indicator of its capacity to support economic activities. In Nigeria’s dynamic financial landscape where industry asset size reached N73.59 trillion in 2022, a bank’s ability to create loan assets through capital-intensive sectors like oil and gas, manufacturing, and infrastructure development proves crucial. A larger asset base allows banks to offer a wider range of financial products and services, fueling economic growth and stability. As banks continue to grow their assets, they contribute significantly to the overall strength of the nation’s financial system.

Moreover, with the advent of technology and digitization, digital income has become a critical metric for banks to assess their competitiveness and adaptability. The Industry’s consistent growth in earnings over the years, supported by digital income, showcases the banks’ competitiveness and ability to explore alternative revenue streams in the digitized era. This also requires huge resources.

DEPLOYING RESOURCES WITH CORE COMPETENCES

However, while the above volume of resources is critical and inevitable for an organization’s success and survival, a mere possession of resources is not enough  until they are deployed to generate competences

To create better  values for money and outperform competitors the management did forget the imperative of building competences to be able to deploy its resources . The bank has continued to  engage on strategies fit , identifying opportunities in the business environment  and adopting resources and competences to take advantage of them; it is equally embarking strategic stretch , by leveraging its resources and competences to provide competitive advantage and or yield new opportunities.

The question is how did Fidelity Bank deploy the available resources to generate competences that tamed and exploited advantages for its stakeholders?

The bank’s net loans and advances rose by 25.5 % to Nt2.66rn in 2023 from N2.12trn in 9M 2022. However, loan advances contributed 49% to the group’s total assets, slightly lower than 53% in 9M 2022, while investment securities had 14.6%, indicating potential for lower interest income. Hence, the group’s total assets rose significantly by +35% to N5.41trn in 9M 2023, and total liabilities grew by +36 % to N5.00trn. The significant growth in total liabilities was driven by deposits from customers and financial institutions, which rose by + 50%(Y-o-Y).

Fidelity with its  big heart for risk taking massively increased its loans and advances to its these stakeholders.  As the deposits grew, the bank could not restrict the comparatively faster pace of loans and advances, a key component of a bank’s maturity transformation too. The bank gave out loans and advances worth a hefty N2.66 trillion, 25.5  percent more than the previous year when N2.12 trillion   was applied.

The bank’s impressive showing as indicated by its earnings and profitability could be attributed its ability to grow its deposit strongly during the period under review .The marketing machine of the bank, it would seem is working overtime, growing deposits; that section of the bank’s balance sheet swung up  33.3percent from N 2.58trillion to N3.44 trillion.

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.

Moreover ,the increase in its Total Deposits    which was driven by 60% growth in low-cost deposits [Demand]   28.7% in Savings and 57% in  Domiciliary  and decrease in its costlier term deposit   by 58%  remain a major high point of its skills that delivered high value with the drop in it average funding cost .

To live up to the expectations of its depositors or the surplus units from which it borrows above , a bank is  usually expected to produce the best possible term in rates of interest and maturity structures and the maximum liquidity to enable them to have the funds back when they want them , or as agreed  

Its capability to  live up to the surplus units was leveraged to satisfy the deficit units which borrow from the banks . The bank gave out loans and advances worth a hefty N2.66 trillion, 25.5  percent more than the previous year when N2.12 trillion   was applied. The indication of this is that Fidelity has a  big heart for risk taking as it massively increased its loans and advances to its these stakeholders .  As the deposits grew, the bank could not restrict the comparatively faster pace of loans and advances, a key component of a bank’s maturity transformation tool.

Boosting its loan size could be traced to the importance of loan portfolio derives from the functions lending performs for banks  ; no doubt ,loan is very critical for the  survival and success of every bank . Loan is ,for instance , is the highest earning asset in the balance sheet ; it contributes materially to the achievement and fulfillment of the objectives  of profitability by providing higher return  than other financial assets ; it helps the bank management to satisfy the legal and regulatory objectives of the monetary authorities ;‘it is a key element in the creation and maintenance of depositor relationships ,particularly with the business firms ; it is a vehicle through which management attempts to satisfy the credit needs of the community or the credit markets the bank serves or intends to serve.

Complementing the above efforts for better profitability is the capability of the bank to live up to the expectations of the regulatory authorities. The bank , indeed, lived up to the expectations of the   regulatory authorities’ whose  interest is to ensure that  a bank  does not undertake excessive risks as it operated prudently and within stipulated regulatory requirements of sound asset quality and capital  adequacy ratio.

This was however challenging. A key challenge before every bank is that  the bigger  the loan  on the balance sheet, though the higher the interest income item on the income statement, the higher the variability or the higher the credit risk. Fidelity Bank is not excluded from this scenario. 

Despite this , the bank prevailed .  Its loan to deposit ratio ,liquidity ratio and capital adequacy ratios were 80%, 48.4% and 16% respectively, all well above the regulatory threshold .The question is how did these three items play out in the case of  Fidelity Bank? As it gathered more deposits and increased its loans to its customers , though its interest income shot up impressively  ,its credit risk as read from the loan to deposit ratio rose swiftly, making the need to increase its capital imperative.

The most inspiring thing about Fidelity Bank in the current financial year is that it  has continued to live up to the above challenges and  expectations of  the deficit, surplus constituencies  regulatory authorities  and  shareholders as indicated above.

Its investors’ inspiration   is beyond the above absolute figures of earnings and profitability . It rests more on the bank’s management ability to deliver better value for money ,its efficiency or resourcefulness that manifests in its Cost to Income Ratio which decreased by 20.4%   to 46.7%  from 67.1% and its  Net Interest Margin which increased from   6.3%  to 8.4%.

These feats are exemplified in several dimensions of its critical performance ratios .First  , upon its   sterling profitability  or its  inspiring rise in bottom line figures, marginal returns headed sharply up.

Operating profit margin hardly improved as it moved up from  55 percent to  69 percent. Pre tax profit margin  inched up  from   15.6 percent    to 28  percent while its net profit margins moved up from 14.5 percent to 23percent . Also , its Return on Equity rose  by 17.4% to 33%from 15.6%With its  feet-footed profitability , its earnings per share,  its monetary share value,  grew by 137% to N2.87 from N1.21 The higher the EPS, the more profitable the bank is. This means that investors holding shares of  Fidelity are getting better values compared to the corresponding time of last year .Fidelity Bank is not excluded from this scenario . 

CORE BANKING INCOME EFFECTIVE FUND PRICING

The first initiative is its strategic move  to increase its earning assets  as indicated bank by the increase in its loan portfolio .If anything, a racy earning assets figure should result in more robust earnings except may be spreads or the difference between interests earned and interests paid are not quite attractive.The bank grew its interest income by 54.4% to N324.82b from N210.35b driven by a higher yield environment and   expansion in earning assets . The success recorded  in interest income could be traced to its wizardry capability for managing  the risk of mismatches between assets and liabilities and between borrowing and lending rates   as well as Fund transfer pricing , a method used by bankers to evaluate the profitability of deposits and loans.

The bank hauled up its net interest income at greater paces by 74.3%  to N194.96 billion from N111.85 billion. The bank got N60 for every N100 of interest earned in  first nine months 2023  compared to N53 in the corresponding period of 2022. 

This superior performance was by yield on earning assets which improve to 14.0% from 12.2% in 2022FY (9M 2022: 11.7%)  .This is as its  average funding cost which dropped marginally by 10bps ytd to 4.5%  as more expensive deposits were replaced with low-cost deposits, leading to an increase in NIM to 8.4% from 6.3% in 2022FY (9M 2022: 6.2%).

However, a major threat or a potential spoiler  to its bottom line remains its credit loss which by 772% to N32b from N3.7b. But its capability to grow its non interest income impressively by  102.8% yoy   anchored on double-digit growth in key income lines (FX Related Income, dividend Income, Trade, Account Maintenance, Digital Income, etc  and supported by increased customer transactions greatly minimized  the damage done to the bottom line. 

Operating expenses increased by 36.7% yoy to N125.3bn, inflecting high-cost operating environment as the headline inflation rate in Sep 2023 spiked to 26.7%.

Staff Cost, Regulatory Charges, and Technology Cost were the key drivers responsible for 62.8% of the absolute growth in operating expenses. However, cost-to-income ratio declined to 46.7% from 67.1% in 2022FY due to strong growth in revenue.

FIDELITY Bank Stock Market Performance

6MO	1YR	YTD
+60.7%	+122%	+107%

One of its stakeholders directly positively impacted by the above  are its shareholders  that require maximum or adequate returns on their investments in order to remain invested in the bank and to be willing to continue to provide additional resources and when needed.

Encouraged by the above strong earnings qualities and fundamentals driven by its able leadership  , investors  have continued to  remain optimistic  about the bank’s loaded potentials.

Fidelity began the year with a share price of 4.35 NGN and has since gained 107% on that price valuation, ranking it 43rd on the NGX in terms of year-to-date performance.

Shareholders can be optimistic about  the bank  knowing the stock has accrued 9% over the past four-week period—51st best on NGX.

With its announcement of an  interim dividend of N0.30k should likely prompt price appreciation, considering that the P/E and book value per share suggest a hidden value.