Fidelity Bank Plc grew the size of the balance sheet by close to 31 percent to N2.6 trillion at the end of the third quarter in September 2020. This is the highest growth in asset base for the bank in a decade.
Low earning liquid assets were the growth drivers in the year. Cash and bank balances grew by more than one-half to N635 billion during the period. Lending to other banks rose by 59 percent to N393 billion while customer lending volume slowed down rapidly in the year.
At about N1.3 trillion, customer loans and advances grew by 13 percent at the end of the third quarter, decelerating from an increase of 33 percent at the end of the prior financial year. The financing liabilities are largely customer deposits that grew by 34 percent to N1.5 trillion – the strongest growth rate since 2011.
The increase in assets did not lead to an improvement in earnings in the period under review. Instead, the bank lost revenue at the end of the third quarter. In the year in which assets grew by the highest margin in a decade, revenue declined for the first time in the decade.
Gross income dropped by about 4 percent to N155 billion year-on-year at the end of September 2020. Revenue weakness came largely from fee and commission income, which dropped sharply by 25 percent to N14.5 billion at the end of September 2020. Interest income – the main revenue line also went down by 2 percent to N132.5 billion year-on-year.
The bank retained some strength in non-interest earnings at the end of the third quarter, which moderated the earnings disappointments in the main income lines. At N25.5 billion, total non-interest earnings rose by 18.6 percent year-on-year.
Two income lines of the bank were the growth drivers of non-interest earnings during the period. One is other operating income, which grew by 21 percent to N8 billion year-on-year. The other is net gains from financial assets, which multiplied from N329 million to almost N3 billion over the review period.
An increase of 31 percent in total assets and a drop of 4 percent in gross earning made a bad combination for Fidelity Bank at the end of the third quarter. The result is a drop in asset turnover from 0.1 at the end of 2019 to 0.08 at the end of the third quarter of 2020.
The bank’s management faced the challenge of how to defend profit against the decline in revenue. Costs needed to go down to make that happen but that was possible only in one major cost line – interest expenses.
Management appears to have maximized the opportunity to slash interest expenses and it did so to the tune of 25 percent at the end of the third quarter. The move went a long way to shield the bottom line from the loss of revenue during the review period.
With interest expenses at N57 billion at the end of the third quarter, the bank looks likely to close the full year with the lowest interest cost since 2017. The drop in cost of funds is against a 34 percent increase in customer deposits, which represents a considerable cut in the bank’s average cost of funds.
A significant cost saving from declining cost of funds is the main positive factor in operations for Fidelity Bank last year. It was the critical factor in defending profit from declining revenue.
Cost saving from the drop in interest expenses lifted net interest income by 29 percent to N75 billion at the end of the third quarter. This is the highest growth in net interest income for the bank since 2016. It reflects an optimized strength in extracting an improved margin of declining interest earnings into operating profit.
Rising credit loss expenses however consumed a good part of the enhanced net interest income. Loan impairment charges sped up in the year from a net write back of N4.8 billion at the same period in 2019 to net loan loss expenses of N11 billion at the end of the third quarter.
That consumed almost all the gain in net interest earnings during the period. Net interest income after loan impairment expenses was only marginally up at 1.4 percent to less than N64 billion at the end of the third quarter. It stood out as the key factor that limited profit improvement in the year.
Fidelity Bank recorded a limited improvement of 7 percent in after tax profit year-on-year to N20.4 billion at the end of the third quarter. That at least sustained it on the path of profit improvement for the fourth year running.
Profit improvement against a decline in revenue reflects a slight gain in profit margin from less than 12 percent in the corresponding period in the prior financial year to 13.2 percent at the end of the third quarter.
It is one of the highest profit margins that Fidelity Bank has seen since 2013. This is the impact of cost saving from interest expenses in defending profit against a drop of over N8 billion in gross earnings in the third quarter.
Return on assets
The bank returned 1.0 percent on total assets at the end of the third quarter, which is a drop from 1.3 percent at the end of 2019. This is the lowest rate of return for the bank in several years, reflecting the weakness in growing assets and losing revenue in 2020. The bank has been growing assets well ahead of revenue in the preceding two years but last year was the climax of the asset-revenue mismatch – which produced a big hit on return.