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Fidelity Pledges No 'False Euphoria' On Planned Stock Split

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Gowon Bowe

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fidelity Bank (Bahamas) yesterday pledged that its proposed early 2020 stock split will guard against the "false euphoria" that such moves sometimes provoke in local shareholders.

Gowon Bowe, the BISX-listed commercial bank's chief financial officer, told Tribune Business that previous stock splits in the Bahamian capital markets had sometimes sparked big swings in a company's share price that were "not based on fundamentals" such as its earnings and profit performances.

Emphasising that Fidelity Bank (Bahamas) was determined to prevent this, Mr Bowe said it planned to undertake an "education process" to ensure shareholders fully understood how a stock split would impact their investment.

Revealing that the bank's board and management had been mulling the move for more than a year, he added that it was "highly unlikely" to happen before year-end given that it is currently focused on concluding the sale of its 50 percent ownership in former investment bank affiliate, RoyalFidelity Merchant Bank & Trust.

Mr Bowe said the plan, which was discussed with Fidelity Bank (Bahamas) shareholders at last week's annual general meeting (AGM), was likely to take the form of a 'three-for-one' stock split based on the bank's current $15.45 per share price.

This means that existing shareholders would receive two additional shares for each current one they hold, reducing the share price to around $5.15 per share based on current market values.

Tribune Business understands that several Fidelity Bank (Bahamas) shareholders have been pushing for a stock split to occur for some time, and Mr Bowe said the bank - while focused on its underlying profitability and investor returns - was willing to accommodate them.

"What we disclosed was we had actually considered this a year and some ago," he said of the AGM stock split discussions. "We had number of transactions taking place with Fidelity Bank (Bahamas) and its divestiture of RoyalFidelity, and we also had some transactions taking place in Cayman. It was a distraction, a stock split, so we deferred it.

"When it was raised at the AGM we said it's coming to the end of the transactions, so we can look further at administrative tools to perform a stock split. There's s number of steps and processes that have to be taken.

"It's highly unlikely to take place before the beginning of next year," Mr Bowe continued, "as we have RoyalFidelity to close before the end of this quarter or early fourth quarter. We have an extraordinary dividend to deal with, and we have some plans in terms of the balance sheet and financing, and are looking at the end of this year to clean that up.

"We'll look at a stock split in the first quarter of next year. It would be based on the share price at the time. If it stands at the $15.45-$15.47 it was at last week you're looking at a three-for-one split on the basis of getting us into the $4-$6 per share price range."

Mr Bowe's reference to an "extraordinary dividend" is the $7.5m one-time gain that Fidelity Bank (Bahamas) anticipates to earn from the sale of its RoyalFidelity equity interest to a management-led buyout. Those funds, to be received from a deal that is still awaiting regulatory approval in multiple jurisdictions besides The Bahamas, are due to be paid out in their entirety before year-end to Fidelity Bank (Bahamas) shareholders.

Stock splits are nothing new to the Bahamian capital markets, with Commonwealth Bank, Cable Bahamas and FOCOL Holdings all BISX-listed companies that previously implemented this strategy. The latter two both used the same 'three-for-one' split that Fidelity Bank (Bahamas) is mulling.

They are typically done to make a stock in demand more affordable to investors, as well as broadening liquidity, boosting trading volumes and expanding the investor base. Sir Franklyn Wilson, FOCOL Holdings' chairman, said his company's 2017 move was designed to make the stock more accessible to retail investors who were potentially intimidated by the high price.

Mr Bowe, though, yesterday expressed scepticism over some of the perceived benefits created by stock splits. Suggesting that there were "misconceptions" over the perceived advantages, he explained that while the share price was reduced there was no change in the value of a shareholder's investment.

"I think it is more for persons who say they have a lower investment threshold and need a certain amount of shares," Mr Bowe told Tribune Business. "It's in effect a sentimental move that says when the stock achieves a certain price level there's a mental block in terms of value for the price. It's really just a call for shares; it doesn't change the value; it doesn't change the underlying fundamentals.

"But we live in the real world, and as a public company have to take this into consideration. If there's increasing requests to consider it [a stock split], management will do so. Ultimately there's a belief that it increases liquidity in the shares, but personally in reality I don't think a stock split actually does that."

Mr Bowe added that Fidelity Bank (Bahamas) Board and management were very conscious that other companies' stock splits had caused an immediate surge in the share price due to the belief that it was cheaper, only for it to fall back when shareholders realised there had been no change in the underlying profitability and prospects of the business.

Revealing that the bank was keen to avoid a repeat, he explained: "Previous stock splits created euphoria where the share price increased substantially only to come down in three to four months' time as the increase was not based on fundamentals; it was based on excitement.

"We don't want to create that type of false exuberance. We want to make sure the market doesn't over-react and build up value not based on fundamentals. We are mindful as a financial institution, and with a management and Board that are former accountants and auditors, that it's done in very modest fashion and we don't create the false impression of a change in value as a result of the stock split.

"It's more heeding these requests and, if they don't contradict with our fiduciary responsibilities, we have no objection to doing so. Earnings per share, return on equity do not change because of a stock split. Ultimately, our performance is what we're focused on."

Fidelity Bank (Bahamas) is 75 percent majority-owned by its parent, Fidelity Bank & Trust International.

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