Fidelity Bank Plc. (Fidelity) released unaudited 9M 2016 results wherein PBT and PAT both declined 29% and 24% YoY to N82 billion and N8.8 billion respectively. The reading marks a an improvement from H1 16 when PBT and PAT were down 35% and 32% YoY respectively as stronger net interest income more than offset weaker noninterest revenue in Q3 16. Relative to our estimates, earnings are modestly ahead due to stronger net interest income than in our forecasts.

• Higher asset yields offsets funding cost blues: In line with sector wide trends for banks that have reported thus far, stronger asset yields (+170bps QoQ) a fallout of the upward loan repricing paved the way for an expansion in interest income (+22.6% QoQ to N3billion).
• Impairment charges moderate, for now: Despite continued deterioration in the macro landscape, loan loss charges declined 61% QoQ to N3 billion with annualized cost of risk sliding 120bps QoQ to 0.6% (9M 16: 0.8%). Despite a rise in NPL ratio (+20bps QoQ to 4.5%) in line with the weak macro landscape, loan loss charges declined -22% QoQ to N3.2 billion with annualized cost of risk sliding 50bps QoQ to 1.7% (9M 16: 1.5%). However, the line item remains the key drag on Fidelity’s results over 9M 16. Fidelity links the asset quality issues to adverse fall-out from NGN depreciation on trade finance facilities in general commerce and manufacturing.
• Asset quality concerns to weigh on earnings outlook: Persisting dollar paucity, which drove higher NPLs in Manufacturing and General Commerce, stoke worries over Q4 16E impairment charges. In addition, we think Fidelity’s exposure to upstream O&G (18%) and Power (11%) leaves it susceptible to pass through from worsening macro land scape. Consequently, we see scope for cost of risk, which currently tracks behind our FY 16 estimate of 2% for Fidelity to rise from current levels. Cumulative impact of our adjustments drive a moderation in FYE 16 earnings (PBT: -46 YoY, PAT: -52%YoY).
• Though Fidelity’s CAR had declined 190bps YTD to 16.8%, management revealed that Fidelity has obtained approval from CBN to allow re-classification of non-distributable reserves in line with proper definition which should raise CAR to 18% on FY audits. Should this process go as planned, Fidelity intends to stick to its dividend pay-out policy of 30-50%. We assume pay-out at the lower band which yields FY 16E DPS of N07 – 7.8% dividend yield on current pricing.
• Fidelity currently trades at P/E and P/B of 2.3x and 0.14x which are at discount to peer average at 4.6x and 0.4x respectively. Though our FVE declines to N1.03, the stock has declined 41% YTD with last trading price of N0.89 implying a NEUTRAL rating on the stock.

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