Fidelity Bank has shown resilience in its financial performance but now faces a critical test: navigating the challenging terrain of the new Central Bank of Nigeria (CBN) recapitalization requirements.
Despite its impressive performance in the 2023 fiscal year, surpassing forecasts and historical trends, the bank must now confront the formidable task of meeting the new capitalization standards imposed by the regulatory authority.
As investors and stakeholders ponder the bank’s ability to weather this regulatory storm, it becomes imperative to assess whether Fidelity Bank’s resilience will prove sufficient to surmount this significant hurdle.
In line with its trend of steady growth, Fidelity Bank achieved significant milestones in 2023. Commenting on the results, the MD/CEO, Nneka Onyeali-Ikpe stated:
- “We concluded the financial year with strong double-digit growth across key income and balance-sheet lines, which underpins our capacity to deliver superior returns to shareholders.”
Indeed, Fidelity Bank’s performance across key income and balance sheet indicators in 2023 is commendable.
Gross earnings grew by 64.9% year-on-year, exceeding its four-year compound annual growth rate (CAGR) of 39%. This growth was mainly fueled by a 55.5% rise in interest income and a significant 132.2% expansion in non-interest revenue (excluding gains from financial instruments).
According to the bank’s 2023 investor presentation report, the growth in interest income is attributed to a consistent increase in asset yield, alongside a significant 58.3% expansion in the earnings base. Specifically, the average yield on earning assets increased from 12.2% in the 2022 fiscal year to 13.5% in 2023.
Profit before tax (PBT) surged by 131.5% in 2023, reaching N124 billion, also surpassing its 4-year CAGR of 64%.
Consequently, the bank has proposed a final dividend of N0.60 to be paid on May 16, 2024, bringing total dividends for the fiscal year to N0.85, representing about 27% payout ratio.
Looking ahead, the bank has set a PBT guidance of N175 billion for the 2024 fiscal year and dividend payout guidance of 25% – 40%.
This seems good and may improve investors’ confidence and as well provide the benchmark for shareholders and investors to assess the bank’s future performance and make informed investment decisions.
Since the announcement in March, the financial banking sector has witnessed a cumulative decline in market capitalization, plummeting by 25% (N1.98 trillion) from its Q1 value of N8.08 trillion to N6.08 trillion as of the close of trading on Tuesday, April 23, 2024.
Specifically, Fidelity Bank has experienced a 10% decline in its share price value and a 17% year-to-date (YtD) decrease. This contrasts with its impressive 149% year-to-date share price gain recorded in 2023.
This indicates a shift in market sentiment likely influenced by the recent regulatory announcement. However, it is important to recognize that market sentiment is inherently cyclical and responsive to performance, trends, news, perception, etc.
Consequently, Fidelity Bank’s ability to navigate the current macroeconomic landscape and address the new capital requirement becomes a pivotal factor.
Despite the bank’s commendable performance across key balance sheet indicators in 2023, including a 56.3% surge in total assets to reach N6.2 trillion and a robust 39.1% growth in net assets to N437.307 billion, the recent CBN recapitalization requirement poses a significant challenge.
Considering this regulatory mandate, Fidelity Bank must secure N370.295 billion to meet the new N500 billion capital requirements. The magnitude of this shortfall presents a formidable obstacle that the bank must strategically address to ensure its continued stability and growth.
During an investor earnings call on April 19, 2024, Fidelity Bank responding to questions, unveiled its strategy for tackling this capital requirement shortfall.
The bank highlighted its proactive stance, revealing that it had obtained approval during the August 2023 Annual General Meeting (AGM) to issue 13.2 billion new shares through a combination of public offers and rights issues, positioning itself ahead of competitors.
According to the Managing Director, the bank intends to address this shortfall through a strategic three-step approach:
- Firstly, by June of the current year, Fidelity Bank aims to enter the market to raise between N120 billion and N150 billion in fresh capital through a public offer and rights issue. This initial step is anticipated to reduce the shortfall to about N270 billion.
- Subsequently, the bank plans to use private and special placements to bridge the gap.
- Lastly, Fidelity Bank intends to conduct a second public offer and rights issue, if unable to achieve its target after the private placement.
Overall, the bank said it aims to finish raising the shortfall by the first quarter of 2026.
This may instil confidence in its management’s capabilities and strategic planning, potentially positively impacting investor sentiment and share value.
However, amidst a heightened risk environment, evidenced by the substantial rise in the cost of risk to 2.6% in 2023 from a mere 0.3% in 2022, alongside a 0.6% uptick in non-performing loans to 3.5%, the pivotal question emerges: Will the bank effectively and efficiently deploy the newly acquired capital?
The bank’s moderate loan growth projection for 2024, set at 10% in constant currency, just marginally higher than the 8% recorded in 2023, reflects a cautious approach considering the anticipated continued elevated risk environment.
Overall, the bank’s declaration of its intention to complete the capital shortfall by the first quarter of 2026 suggests a commitment to pursuing independent growth strategies rather than considering alternatives such as merging with another institution or relinquishing its international license and that is paramount for shareholders and investors.
