Fidelity Bank: Stability in Volatility


Volatility in the operating environment is a fact of business and the ability to maintain stability through the swings is a true test of how good is management. Fidelity Bank is one of the few banks that stood firm amid the generally bad earnings season that undermined the profit capacity of companies in 2015. Companies that rise and fall with the business cycle carry higher investment risks than those with stable earnings through the times.

The bad earnings season is continuing into the current year with rising cost and revenue weakness hurting the bottom line. Fidelity bank is again showing relative stability in earnings that is expected to speed up in subsequent interims to maintain the stable growth record the bank has displayed so far in a volatile market.

The bank maintained stable growth in revenue in 2015 and succeeded in defending profit in a year in which major banks either landed in huge losses or suffered sharp profit drops. The bank’s first quarter report for 2016 remains promising for stable growth at full year despite the year-on-year declines in revenue and profit.

Banks generally have been experiencing sharp growths in two main expenditure lines since 2013. These are impairment charges for credit losses and interest expenses. They are the source of the major kink in the cost structures of banks that ravaged their income statements in 2015 and consequently slashed profits in the year.

The unfavourable cost behaviour last year is further reinforced in many banks so far in the current year. Revenues aren’t flowing down to profit and this is the price that shareholders are made to pay for the inability of a growing number of bank borrowers to pay back their loans as well as high cost of funds of which banks themselves also fill the pain.

Fidelity Bank moved against the trend of rising cost in 2015, which enabled it to keep profit up and continue its recovery journey into the second year. A 16.2% growth in interest income and an 8.7% increase in interest cost enabled the bank to achieve a 25% leap in net interest income, which gave it a lot of operating stability in the year.

The favourable cost behaviour is continuing for the bank in the current year though revenue constraint presented a weak point on the income statement in the first quarter. Non-interest income is the culprit, which is declining for the third year running.

First quarter operations ended with gross earnings of N34.36 billion for Fidelity Bank, which is a decline of 5.5% year-on-year. The earnings weakness came from fee income, as other operating income fell by more than 93% during the period. The full year earnings outlook still indicates moderate growth in revenue for the bank in 2016.

Earnings growth is expected to accelerate for the bank in the course of the year, as general economic activity picks up from the first quarter level. The bank has maintained stable growth in revenue overnnamdi-fidelity-md the years, accelerating mildly in 2015.

The bank earned an after tax profit of N13.9 billion at the end of 2015, a marginal improvement over the preceding year’s figure of N13.79 billion. It succeeded in holding profit up for the second year after a drop in 2013. The bank’s after tax profit amounted to N3.58 billion at the end of the first quarter, which is a drop of 10.5% year-on-year. The drop in profit follows the decline in revenue during the period as well as a relatively strong growth in operating cost.

Based on the current growth rate, the bank is expected to achieve a faster growth in after tax profit at full year than recorded last year. One area to watch is operating cost, which rose by 15.7% to N16.03 billion year-on-year at the end of the first quarter against the decline recorded in gross earnings. This means, the bank is devoting an increased share of revenue to operating expenses. The cost margin is up from 38.1% in the same period last year to 46.7% at the end of the first quarter. The increase is largely responsible for the decline in profit in the first quarter.

The other main cost lines of the bank remained under control at the end of the first quarter. Loan loss expenses, the main problem area for banks generally, remain not only comparatively small for Fidelity Bank but also dropped by 27.5% to N739 million in the first quarter. This is one of the lowest loan loss expenses seen in the banking sector so far on a net credit volume of over N590 billion.

Interest expenses, the second problem area for banks, also dropped by 11% for Fidelity Bank in the first quarter. This is against an increase of 7.7% in interest income during the period. The bank therefore lifted net interest income by 30% to N16.1 billion at the end of the first quarter.

The decline in revenue and the increase in operating cost margin depressed profit margin during the review period. Net profit margin declined from 11% in the first quarter of last year to 10.4% at the end of the first quarter of the current year. This is still slightly better than the net profit margin of 9.4% at which the bank closed last year’s operations. A step up in revenue growth in the subsequent quarters can be expected to reduce the cost-income ratio and improve profit margin for the bank.

The bank earned 12 kobo per share at the end of the first quarter, down from 14 kobo in the same period last year. It is expected to earn 50 kobo per share at the end of the year based on the full year profit projection. It earned 48 kobo per share at the end of 2015 and paid 16 kobo per share in cash dividend to shareholders. It has been consistent with dividend payment over the past four years.