Fidelity Bank Rated Hold, Price Target Upgraded
Tier-2 lender, Fidelity Bank Plc share has been downgraded from buy to hold rating as equity analysts’ price target for the ticker inched higher. According to its latest equity report, Cardinalstone revised its 12-month target price to N3.86 from N3.18 on expected improvements in net interest income and mean return on equity.
Projecting for the year, the multi-assets investment banking firm revised its 2022 earnings forecast for Fidelity bank to N43.4 billion from N40.5 billion previously, after adjusting for the insights from the Q1-20022 financial results.
The new projection, according to analysts, reflects changes to the firm’s net interest margin expectation, up 70 basis points to 4.7 %. Cardinalstone said it now expect the projected improvement in net interest margin (NIM) to make up for lower non-interest revenue (NIR) and sustained cost pressures.
Between financial year 2022 and 2024, CardinalStone analysts are projecting that NIMs are also likely to average about 5.1% compared to 4.1% in previous projected on rising yields, improving asset base, and expected temperance in cost of funds.
Thus, analysts at CardinalStone raised their 12 -month target price to N3.86 and revise the rating on the stock to a HOLD from BUY.
Interest cost is likely to remain elevated
According to the equity report, analysts said despite the 5.8 percentage point increase in the bank’s current, savings account (CASA) ratio to 80.3% in Q1-2022, the average cost of funds rose by 30 basis points to about 4.5%.
Analysts said they expect this pattern to continue in the coming quarters due to a projected 16.4% deposit growth in 2022, and the doubling of Eurobond liabilities to $800 million in October 2021 as management looked to proactively take advantage of the low yield environment on fears of material monetary policy tightening in global markets.
Non-Interest Revenue (NIR) is projected to contract in 2022 as the report stated that Fidelity Bank is likely to experience NIR weakness by the end of the current financial year.
This position is premised on projected unrealized foreign currency revaluation losses that may arise due to the naira strengthening at the Investors and Exporters FX window. Exchange rate as of the year-end 2021 printed at N435/$ as against current levels of N420/$ at the official FX window.
Analysts said even though their previously communicated fair value estimate was about N440/$, there is now an increasing likelihood that the CBN may continue its aggressive stance on the currency. READ: Fidelity Bank Raised $400 Million Eurobond at 7.625%
The likely fallout of such a stance may come from an “artificial” naira appreciation at the I&E window, leading to losses on net long FX positions, according to the equity report.
Elsewhere, analysts said they also worry about the bank’s accelerating fee and commission expenses that inched up 69.3% year on year, which, if unchecked, could potentially undermine the projected improvement in fee and commission income.
Fidelity Bank operating expenses excluding regulatory charges continue to improve, according to analysts. The improving operating efficiency has contributed to a sustained moderation in the cost-to-income ratio ex-regulatory charges.
Cardinalstone analysts said the adjusted cost to income ratio has consistently trended downwards from 62.4% in 2019 to 46.2% in Q1-2022. The report said Fidelity Bank attributed the moderation in the operating expenses ex-regulatory charges to its process improvement and cost optimization initiatives.
However, for the financial year 2022, CardinalStone analysts expressed the view that higher regulatory charges -35.0% of operating expenses- would continue to undermine the bank’s cost-cutting initiatives. Hence, analysts projected a 1.0 percentage point increase in cost to income (CIR) to 66.0%.
Asset and capital ratios: Notwithstanding the aggressive gross loan cumulative average growth rate of 24.5% between 2018 and 2021, Fidelity has consistently reported moderation in the NPL ratio, according to the equity report.
Cardinalstone stated that another marker of potential asset quality improvement is the reduction in the bank’s stage 2 loans to 14.8% in the financial year 2021 from 21.8% in 2019. Stage 3 loan now constitutes 2.9% of total loans.
“We also note the significant moderation in cost-of-risk to 0.04% relative to 0.4% in 2021. We expect the bank to sustain the traction on these fronts in the near to medium term”.
Elsewhere, analysts said they like the robust capital adequacy ratio (CAR) which improved to 20.1% in the financial year 2021 from 18.2% in 2020, noted that the increase in CAR was partly supported by higher tier 2 capital.
Cardinalstone analysts now expect an average return on equity of 14.1% over the forecast horizon against a 5-year historical mean of 11.4%. #Fidelity Bank Rated Hold, Price Target Upgraded