Fidelity Bank’s Capital Raise Hybrid Right Issues and IPO: The Takeaways

Staying true to its earlier announced plan to address the shareholders’ funds shortfall necessitated by the CBN’s new capital requirement, Fidelity Bank launched a hybrid offer of a rights issue and an Initial Public Offer (IPO) on June 20, 2024. 

The offer consists of: 

• Rights Issue: 3.2 billion ordinary shares at N9.25 each for existing shareholders, based on one new share for every 10 held as of January 5, 2024. 

• IPO: 10 billion ordinary shares at N9.75 each, available to the public. 

Considering the share price of N12.95 on January 5, 2024, and the average share price of N10.35 between January 5, and June 20, 2024, both the rights issue and the IPO appear to be discounted. 

The key questions are: How will this impact the bank’s bottom line? Is it advantageous for shareholders to exercise their rights? Is the offer beneficial for potential investors? 

At the “N127.10 billion Public Offer and Rights Issue Facts Behind the Combined Offer” event held at the Nigerian Exchange Limited Headquarters in Lagos, Nneka Onyeali-Ikpe, the Managing Director and CEO of Fidelity Bank Plc, stated that the funds raised will: 

• Enhance the bank’s market position and expand its international footprint. 

• Position the bank as a frontrunner in the banking industry’s effort to increase capitalization in line with the bank’s announced plans.

• Support the bank’s strategic growth plan, technological transformation, and customer business initiatives. 

The initiatives announced by Fidelity Bank are achievable and have the potential to enhance the bank’s bottom line, provided that the funds are effectively deployed.  

There is a heightened risk environment. This is evidenced by a significant increase in the cost of risk to 2.6% in 2023 from a mere 0.3% in 2022, along with a slight uptick in non-performing loans to 3.5%. 

In response to these challenges, the bank has adopted a cautious approach.

For the fiscal year 2024, it has set a moderate loan growth projection of 10% in constant currency, which represents a slight increase from the 8% recorded in 2023. 

That said, Fidelity Bank has shown resilience in its financial performance so far, achieving significant milestones in 2023 in line with its trend of steady growth. Commenting on the results, 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.” 

Looking forward, the bank has projected a PBT target of N175 billion for the 2024 fiscal year, with a dividend payout range of 25% to 40%.  

Fidelity Bank’s strong performance across key income and balance sheet indicators in 2023, coupled with these forecasts, is commendable.  

However, it is crucial for Fidelity Bank to not only meet but exceed these targets to sustain and enhance investor confidence, especially during its current market activities. 

Fidelity Bank’s position as the most actively traded stock on the Nigerian Stock Exchange over the past three months (from March 14 to June 21, 2024) highlights the market’s interest and potential positive sentiment surrounding the bank’s ongoing initiatives. 

The share price has declined by 8.76% year-to-date, closing at N9.90 on Friday, June 21, 2024. This includes a 4.81% decrease observed immediately after the announcement of the rights issue and IPO on June 20, 2024. 

Takeaways for Shareholders and Investors: 

Existing Shareholders: 

• Potential Dilution: The issuance of new shares in a rights issue can dilute the ownership percentage of existing shareholders if they do not participate.  

• Opportunity to Buy at a Discount: Existing shareholders can purchase additional shares at N9.25, which is below the January 5, 2024 price of N12.95, and the average market price of N10.38 between January 5 and June 20, 2024. This opportunity allows shareholders to acquire shares at a lower cost, which can lead to immediate unrealized gains if the market price remains above the rights issue price. 

• Value Consideration: The lower price might reflect management’s strategy to ensure full subscription of the rights issue, signaling confidence in the bank’s future performance. 

For New Investors: 

• Entry at a Lower Price: New investors can purchase shares at N9.75, which is below this year’s average market price of N10.38. This entry point offers potential for capital appreciation if the share price rebounds to or surpasses this average price as well as historical averages of N6.38 in 2023 and N3.11 in 2022. 

• Analysis shows that FIDELITYBK has shown minimal price fluctuations over the past 3 months. Its weekly volatility, at 11%, has remained stable over the past year. 

• Furthermore, analysts have set a 12-month median price target of N11.55, ranging from a high estimate of N14.17 to a low estimate of N10.03. The median target reflects a potential 16.67% increase from the current price of 9.90. 

This analysis points to the potential for capital appreciation for new investors participating in the IPO at N9.75 per share.  

With analysts forecasting a median price target of N11.55 over the next year, investing at the IPO price presents an opportunity to capitalize on potential future gains as the stock moves towards its target prices. 

However, it is important to note that issuing many new shares at a discount could temporarily impact the market price, potentially causing short-term volatility.

Both existing and new investors should be aware of this possibility and consider the long-term prospects of the bank.