Fidelity Bank Plc suffered a 21% decline in quarter-on-quarter after-tax profit to N7.2 billion in the third quarter as soaring cost of funds consumed its profits. This diluted the strong growth momentum the bank recorded in the semester.
Interest expense rose 85% quarter-on-quarter to N33.6 billion for the three months, which was around 47% of the nine-month figure of N72.5 billion.
This compares with an increase of less than 8% in interest income to 48 billion naira for the third quarter. Interest expense consumed approximately 71% of interest income in the quarter, resulting in a 45% decline in net interest income quarter over quarter.
The impact of the higher cost of funds on earnings was largely mitigated by a decline in loan impairment charges to negligible levels in the quarter as well as lower operating expenses.
Despite this, the bank still suffered a drop in profits during the quarter, which slowed the year-on-year growth records. From a record 71% growth in the bank’s after-tax profit in the half-year, profit slowed to less than 30% to reach N26.5 billion at the end of the third quarter.
Interest expense has been volatile this year, after falling 4.4% in the prior year. After falling 26% in the first quarter, interest expense ended only slightly lower in the first half before the third quarter rise led to a 26% year-on-year increase at the end of September 2021 .
Fidelity Bank’s third quarter report shows continued improvement in revenue performance, going from a marginal decline in the first quarter to a 6% increase in the six months, accelerating further to reach 12.5% growth in year-on-year at the end of the third quarter.
Gross profit of more than 174 billion naira at the end of third quarter operations represents additional revenue of more than 19 billion naira year-on-year. The challenge is that the rising cost of funds has prevented management from converting much of the revenue gains into profit.
However, cost savings from loan impairment and operating expenses kept the bank on course for a turnaround late in the third quarter.
There is a significant decline in credit loss expense that spans all three quarters of the year. The rate of decline continues to accelerate, going from 40% in the first quarter to 71% in the half and 78% at the end of the third quarter.
The bank closed third quarter transactions with a loan impairment charge of less than 2.5 billion naira, compared to more than 11 billion naira in the same period last year. The bank is expected to record one of the lowest loan losses in a decade this year.
There is also a reduction of more than 5% in total operating expenses during the period to close at less than 64 billion naira in September.
The cost savings allowed the bank to moderate the rising cost of funds and keep earnings growth well ahead of revenue. It improved its net profit margin from 13.2% in the same period last year to 15.2% at the end of the third quarter.
The bank’s management is still on course for a turnaround so far, with revenue and profit recovering from last year’s declines. Gross revenue was down 3.2% at the end of 2020 and net profit was down more than 6% during the year.
The revenue recovery is therefore a major force for the bank this year with improvements affecting the bank’s broad lines of interest and non-interest income.
Interest income rose from a marginal increase of less than 2% in the half to around 4% to end the third quarter in the region of 133 billion naira. This against a 4.4% drop in interest income at the end of 2020.
The growing volume of customer loans is helping to support interest income. Loans and advances to customers increased by almost 27% to more than 1.6 trillion naira at the end of the third quarter, from 6.5% in the first quarter to 16% in the half.
The bank is increasing its credit volume by double digits for the fourth consecutive year, accelerating from a growth of 20.6% in 2020.
Non-interest income led the revenue growth, rising from a 10% increase in the first half to 25% to close at N32 billion at the end of the reporting period. It is also a strong improvement from a marginal increase of less than 2% in non-interest income at the end of last year.
The bank’s full-year outlook hinges on its ability to moderate the rising cost of funds with revenue acceleration and cost reductions related to loan impairments and operating expenses.