Bank To Experience Shrinking Profit Margins And Earnings By 2028

Key Takeaways

• Fidelity Bank aims to enhance profitability through regional expansion, technological upgrades, and cost control, supporting future revenue and net margin growth.
  
• Strategic focus on earning assets and noninterest revenue expansion is expected to boost net interest margin and profitability through efficient income diversification.
  
• Fidelity Bank's improved net interest margin, noninterest revenue growth, and strategic digital focus suggest potential for sustainable revenue growth and long-term market strength.

Catalysts

Provides various banking products and services to corporate and individual customers in Nigeria.

• Fidelity Bank plans to raise additional capital through private placement by Q3 2025 to support regional expansion, technology upgrades, and enhanced working capital, which could improve future revenue streams and net margins by strengthening their operational base.
  
• There's a strategic focus on expanding the bank's earning assets and low-cost deposit base, driving the net interest margin (NIM) higher. This is expected to significantly impact earnings positively as the NIM has already risen to 13.4%, boosting interest income.
  
• The bank is optimizing fee-based income, aiming to expand noninterest revenue by increasing customer transaction levels. This focus on driving activities in electronic channels is likely to enhance revenue growth and improve overall profitability.
  
• Fidelity Bank is engaged in strategic cost control measures, reducing its cost-to-income ratio significantly due to technological investments and operational efficiencies, thus likely improving net margins.
  
• Expansion plans include entering additional African markets and improving the performance of Fidelity UK, potentially leading to a 2%-5% contribution to the group’s profit in the medium term, further diversifying revenue streams and stabilizing earnings growth.

Fidelity Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fidelity Bank's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 38.6% today to 23.3% in 3 years time.
• Analysts expect earnings to reach NGN 152.6 billion (and earnings per share of NGN 5.48) by about February 2028, down from NGN 232.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, up from 2.5x today. This future PE is greater than the current PE for the NG Banks industry at 2.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 30.08%, as per the Simply Wall St company report.

Fidelity Bank Future Earnings Per Share Growth

Risks

• Fidelity Bank has shown a significant improvement in net interest margin (NIM), rising from 8.1% to 13.4%, and a notable increase in total deposits, which could suggest sustained revenue and earnings growth.
  
• The bank's strong performance in fee-based income, including a 31% increase in net fee income and growth in areas like account maintenance charges and trade income, suggests potential for continued improvements in noninterest revenue.
  
• Fidelity Bank is actively managing its cost-to-income ratio, which decreased to 40.3% from 50.4% thanks to revenue growth, indicating potential for improved net margins despite growing expenses.
  
• The strategic use of technology and emphasis on digital banking platforms are enhancing customer transactions and revenue streams, suggesting sustainable growth in revenue and efficiency.
  
• Successful capital raise efforts and planned regional expansion highlight potential for long-term growth in earnings and a stronger market position, potentially stabilizing or increasing share price.

Valuation

• The analysts have a consensus price target of NGN17.16 for Fidelity Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NGN22.32, and the most bearish reporting a price target of just NGN12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NGN655.4 billion, earnings will come to NGN152.6 billion, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 30.1%.
  
• Given the current share price of NGN17.95, the analyst price target of NGN17.16 is 4.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.