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ARM Research assigns buy rating on Fidelity Bank’s shares

A group of analysts at ARM Research, an independent research and equity firm, has assigned buy rating on shares of Fidelity Bank Plc, saying that they had to revise the estimate upwards based on performance surprises by the bank.

They observed that the rating was underpinned by the significant upside potentials of the bank’s financials supported by attractive valuations, adding that share price would likely hit N3.28 by year end.

By this rating, investors are required to increase their patronage of the stock except on portfolio realignment consideration.

“Fidelity Bank reported gross earnings of N22.4 billion for 3 months ended March 2012; a 46 per cent Year-on-Year, YoY, growth. PBT and PAT rose 140 per cent and 137 per cent YoY, respectively to N4.2 billion and N3.4 billion. Topline growth was driven by interest income.

In line with industry trend in first quarter of 2012, Fidelity bank reported robust top-line performance which largely reflects significantly higher interest rates during the quarter compared to the corresponding period in 2011. Interest income rose 76 per cent YoY to N17.6 billion in tandem with 40 per cent loan growth and over ten-fold increment in investment securities YoY,” said the report by the analysts.

They further stated, “We estimate, CAR at 35 per cent, which is more than sufficient to drive growth in the medium term, in our view, but have tempered our expectations for risk asset creation in the near term in view of heightened competition in the industry and elevated money market yields.

“We expect interest income to remain the main driver of revenue growth and have revised our gross earnings estimates higher to N90 billion for full year, 2012, to account for the stronger run-rate in quarter one figures, driven by higher asset yields (13.4 per cent) than we expected (9.5 per cent).”

The analysts noted that the recent rapid improvement in cost-to-income ratio may have captured most of the benefits from cost-cutting initiatives, saying that it is expected that the current levels of 65 per cent may persist over the forecast horizon.

“Our expectations for provisioning are similarly benign over our forecast horizon; driven by similar factors for the current year and we expect cost of risk to remain stable at ~2 per cent,” the report added.

The analysts stated that based on recent branch expansion drive, the bank will be able to sustain its deposit growth, saying that branch network expansion is expected to be the main driver of balance sheet growth going forward.

“Furthermore, in line with Fidelity’s resurgent risk appetite, having systemically reduced NPLs over the course of the last two years, we expect loan deposit ratio will recover to historical four-year average over our forecast horizon. We expect some recovery in the contribution of non-interest income with increasing throughput from Fidelity’s larger branch network,” it further stated.


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