Surge in Fidelity Banks customer deposits push up net loans by 12%

Fidelity Bank has released its unaudited third quarter 2011 results, showing the bank’s

Fidelity Bank has released its unaudited third quarter 2011 results, showing the bank’s gross earnings go up by 15 percent to N47.0billion, from N41.0 billion posted in the corresponding quarter of 2010.

Meanwhile the company’s profit before tax (PBT) went up by a marginal 2.7 percent to 7.6 billion from 7.4 billion, while profit after tax increased by 3.6 percent from N5.8 billion to 6.0billion.

Analysts at Afrinvest while reviewing the banks result, said relative to our estimates, PBT came in a marginal 1.5% below our N7.7bn estimate, while PAT was pretty much  on target.

They went on to say, the figures also witnessed a mild deterioration in margins, down 1.9 percent and 1.4percent to 16.1percent and 12.9 percent for Profit Before tax and profit after tax respectively.

Afrinvest said :”Following our review, it was observed, that the acceleration in credit growth (loans grew by more than two fold in Q2 at 9.6percent versus the 4.5percent achieved in Q1), evidenced by the 12.1percent, (Quarter-on-Quarter) rise in net loans in Q3(Third Quarter), as an indication of a more robust risk appetite in 2011. This obviously rides on the remarkable surge in customer deposits, up 42.4 percent in Q3 (aggregate YTD (year till date) growth to 48.1percent for 2011) which had a net positive impact – a 110basis points (Quarter-on-Quarter) reduction to 3.4percent – on the banks cost of funds, by our estimates”.

Afrinvest, however said they remain concerned with asset quality, given that the bank reported NPL (Non performing Loan) ratio of 16 percent as at Q2 (2nd quarter), significantly higher than the sub 10.0percent for other banks.

They further said, without the benefit of management guidance regarding the numbers, we believe that the aggressive approach towards organic balance sheet growth, is a consequence of the unsuccessful bid to acquire or merge with Mainstreet Bank (erstwhile Afribank) during the just  concluded CBN induced M&As (Merger and Acquisitions).

‘The high level of capital on the books of the bank (Full Year 2010 Capital Adequacy Ratio of 43.8percent versus 26.3% for banks, ex-rescued lenders), while still an indicator of inefficient use of balance sheet, continues to present a potential war-chest for M&A’.

They further disclosed that, on the basis of this performance, Fidelity trades at 8.3times trailing earnings (trailing earnings per share of N0.21 and market price of N1.74 as at November 01, 2011),a slight discount to peer average of 9.5times trailing  2011earnings.

Going further, Afrinvest said, from a book value perspective, the extent of undervaluation is even more stark – 0.4times 2010 book versus peer average of 0.7times book. Having adjusted our long term forecasts for Fidelity and arriving at an intrinsic price of N2.24 (and an implied Target Price of N2.65), they reiterated a BUY recommendation on the stock, given its trading multiples and the underlying discounts in valuation.