Fidelity Bank’s loan impairment expenses drop in Q3

Fidelity Bank Plc suffered a drop of 21 percent in after tax profit quarter-on-quarter to N7.2 billion in the third quarter as surging cost of funds consumed earnings. That has diluted the high growth momentum the bank registered at half year.

Interest expenses advanced by as much as 85 percent quarter-on-quarter to N33.6 billion for the three months – accounting for about 47 percent of the nine-month figure of N72.5 billion.

This compared to an increase of less than 8 percent in interest earnings to N48 billion for the third quarter. Interest expenses consumed about 71 percent of interest earnings in the quarter, resulting in a drop of 45 percent in net interest income quarter-on-quarter.

The impact of rising cost of funds on earnings was largely moderated by a drop in loan impairment expenses to insignificance in the quarter as well as a decline in operating cost.

Despite that, the bank still suffered a profit drop in the quarter that has slowed down the year-on-year growth records. From a top record growth of 71 percent in after tax profit the bank achieved at half year, profit decelerated to less than 30 percent to N26.5 billion at the end of the third quarter.

Interest expenses have followed a volatile behaviour this year, waking up from a 4.4 percent decline in the preceding financial year. From a 26 percent drop in the first quarter, interest expenses ended only slightly down at half year before the third quarter upsurge led to a year-on-year increase of 26 percent at the end of September 2021.

Fidelity Bank’s third quarter report shows a continuing improvement in revenue performance from a marginal decline in the first quarter to 6 percent increase at half year, accelerating further to 12.5 percent growth year-on-year at the end of the third quarter.

Gross earnings of over N174 billion at the end of the third quarter operations represent an additional revenue of over N19 billion year-on-year. The challenge is that rising cost of funds prevented management from converting much of the revenue gains into profit.

However, cost savings achieved from loan impairment and operating expenses helped to keep the bank on the course of a turnaround at the end of the third quarter.
There is a major drop in credit loss expenses that cuts across the three quarters of the year. The rate of the drop keeps accelerating from 40 percent in the first quarter to 71 percent at half year and further to a 78 percent at the end of the third quarter.

The bank closed the third quarter trading with a loan impairment charge of less than N2.5 billion compared to over N11 billion in the same period last year. The bank is likely to record one of the lowest credit losses in a decade this year.

There is also a reduction of over 5 percent in total operating expenses over the period to close at less than N64 billion in September.

The cost savings enabled the bank to moderate rising cost of funds and to keep profit growing well ahead of revenue. It improved net profit margin from 13.2 percent in the same period last year to 15.2 percent at the end of the third quarter.

The bank’s management is still maintaining the course of a turnaround so far with revenue and profit recovering from declines last year. Gross earnings had declined by 3.2 percent at the end of 2020 and net profit went down by over 6 percent in the year.

The upturn in revenue is therefore a major strength for the bank this year with improvements cutting across the broad interest and non-interest income lines of the bank.

Interest earnings stepped up from a marginal increase of less than 2 percent at half year to roughly 4 percent to close the third quarter in the region of N133 billion. This is against a decline of 4.4 percent in interest earnings at the end of 2020.

Growing customer lending volume is helping to prop up interest income. Customer loans and advances grew by close to 27 percent to over N1.6 trillion at the end of the third quarter, accelerating from 6.5 percent in the first quarter and 16 percent at half year.

The bank is raising credit volume by double digits for the fourth year running – accelerating from 20.6 percent growth in 2020.

Non-interest income is leading revenue growth, accelerating from 10 percent increase at half year to 25 percent to close at N32 billion at the end of the review period. This is also a strong improvement from a marginal increase of below 2 percent in non-interest income at the end of last year.

The full year outlook for the bank hinges on the ability to moderate rising cost of funds with accelerating revenue and cost reductions in loan impairment and operating expenses.