Fidelity Bank’s Q1 120% profit surge to boost recapitalization plans

Fidelity Bank released its unaudited financial results for Q1 2024, showing pre-tax profit rose 120.14% to N39.497 billion.

In just three months, the bank has already generated a third of the total profits recorded for all of 2023, a major boost for its recapitalization plans.

The bank is expected to raise as much as N370.3 billion if it is to meet the mandatory recapitalization plans.

Key drivers for Fidelity Bank

The pre-tax profit growth can be attributed to the substantial increase in interest income generated from loans and advances to its customers.

  • The group reported a surge in interest income, rising by 91% year-on-year to N170.138 billion, and that accounted for 89% of the gross revenue of N192.086 billion.
  • Interest income from loans and advances to customers played a crucial role, comprising 75% of the total interest income.
  • The growth in interest income appears to be driven by a combination of expansion in loan portfolio and a rise in interest rates.
  • Notably, the group’s loans and advances, a key causative factor, expanded by 21.21% or N655.799 billion to N3.748 trillion.

Banks in Nigeria have seen their interest income skyrocket from a higher interest rate environment.

Nigeria’s central bank has also raised its benchmark interest rate by 600 basis points, climbing from 18.75% in Q4 2023 to 24.75% in Q1 2024, boosting commercial bank’s ability to raise interest rates on their loans.

Due to the uptick, the Group earned N128.536 billion in interest income from these loans and advances.

However, it also made provisions for losses amounting to N10.827 billion on these loans.

Despite the substantial 224% year-on-year growth in provisions, it constitutes only 8% of the interest income earned from loans and advances to customers.

This indicates that despite setting aside more funds for potential losses, the income generated from lending activities is substantial enough to cover these provisions comfortably and suggests that Fidelity Bank is effectively managing its lending risks.

Foreign exchange gain plays major role

That said, then it is important to note that the group recorded substantial unrealized foreign exchange gains of N3.270 billion, in stark contrast to the modest loss of N32 million reported in Q1 2023.

This indicates that the Group experienced a significant improvement in its foreign exchange position compared to the same period in the previous year.

This improvement indicates a more favorable currency exchange environment for the group during Q1 2024, potentially contributing positively to its overall financial performance.

What this means for the bank’s shareholders

The strong financial performance and growth trajectory may improve investor sentiment in a stock that was one of the best-performing stocks last year with about 149% return.

However, its impressive performance is somewhat impacted by the Central Bank of Nigeria’s (CBN) new capital requirement plans.

This development appears to have unnerved investors, leading to a decline in the share price of banking stocks, including Fidelity Bank, which has experienced a year-to-date decrease of 16.59%.

Fidelity faces the daunting task of raising an additional N370 billion by far the highest of any Tier 2 bank and only third to UBA Plc and FCMB Group respectively.

In its most recent investor earnings call held on April 19, 2024, the Group reassured its shareholders and investors that the bank is positioned to raise the required capital, with plans to conclude the process on or before Q1 2026. Its first-quarter performance may also boost investor confidence.

Fidelity Bank’s Valuation

In addition, Fidelity Bank stock is currently trading below its book value, as reflected in its price-to-book ratio of 0.68. This implies that investors are paying N0.68 for every N1 of the company’s book value (its assets minus its liabilities).

For value investors seeking bargains, such a low price-to-book ratio could present an attractive investment opportunity, particularly in the context of Fidelity’s plans to raise fresh capital.

In essence, while investor sentiment may be affected by the new capital requirement, the undervaluation of Fidelity Bank’s stock relative to its book value could be seen as a potential opportunity for investors.

This is especially pertinent as the bank prepares to enter the market in June to commence raising the required capital.

-By Idika Aja


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