Earnings Report /
Zimbabwe

FBC Holdings: Diversified income base spurs H1 19 performance

    Takudzwa Sherekete
    Takudzwa Sherekete

    Junior Equities Analyst

    IH Securities
    6 September 2019
    Published by

    Non-funded income drives group performance

    FBCH’s diversified business model resulted in the Group recording a 207.7% increase in total revenue, on the back of a 410.5% hoh growth in non-funded income to ZWL$171.0mn. This offset a 11.6% hoh decline in net interest income, attributed to the repricing of interest expenses after the upward review of the overnight window by the RBZ to 50% per annum, which outpaced the repricing of the Group’s loan book. 

    Growth in non-funded income was largely due to leveraging digitalisation, the upward review of service fees and the re-introduction of the local currency resulting in an increase of the total income by cZWL$27.1mn from the revaluation of investment properties. Operating expenses increased 176.0% hoh to ZWL$87.7mn in line with the current inflationary pressures in the economy. 

    Leveraging non-funded income and business model diversity 

    Lending is set to remain subdued as the banks continue to experience real negative returns on net interest income with inflation outpacing the rise in lending rates. NIM is expected to come under pressure as the cost of funds continue to increase with depositors expected to reprice deposit interest rates to match the RBZ overnight window rates. We forecast a 19.9% decline in NIM to ZWL$52.2mn from ZWL$65.2mn. The Group is expected to leverage on its upgraded systems for seamless product offering and improved customer experience. We therefore anticipate that the decline in NIM will be offset by the growth in non-funded income of c172.0% to $219.6mn supported by growth in net fees and commissions which are, in turn, sustained by the upward review of service fees and net trading income. 

    Despite the improved systems resulting in a leaner cost structure, we anticipate that operating expenses will increase to ZWL$136.9mn from ZWL$91.3mn due to the current high inflation in the economy. FBCH remains committed to strengthening its compliance to ensure its brand and reputation are of the highest standard to attract more customers. 

    Meanwhile, we anticipate property sales to be subdued in the following year as pricing distortions have caused a dislocation in property valuations at the completion of constructions. Going forward, we anticipate an upward movement in net income to ZWL$81.8mn in FY 19 (from ZWL$44.4mn) on the back of a 172.0% increase in non-interest income to ZWL$219.6mn (from ZWL$80.7mn), offsetting a 19.9% decline in net interest income to ZWL$52.2mn (from ZWL$65.2mn). We expect operating expenses to grow by 137.4% to ZWL$108.36mn as inflationary pressures continue. The cost/income ratio is expected to reduce from 50.4% (from 63%) in FY 19 largely from the rise in exchange rate gains pushing up non-funded income. We expect deposits and borrowings to grow at a rate of 50% to ZWL$941.9mn, largely due to the translation of foreign currency-denominated balances.

    Recommend Hold from U/R on improved clarity in monetary environment

    We forecast net income to grow by 84.1% in FY 19 to ZWL$81.8mn, up from $44.4mn in FY 18. We forecast ROAEs to rise to 41.1% in FY 19 and soften in FY 20 to 34.6% from 28.3% in FY 18. FBCH trades on FY 19f P/BV (+1) of 0.73x and P/E (+1) of 2.28x, versus regional peers at P/BV 2.5x and P/E 9.9x for 2019f. Although the metrics appear attractive, using our combined method of DDM and Static ROE, we arrive at a TP of ZWL$0.68. We update our recommendation to a Hold from U/R as the introduction of the local currency provides a clearer picture of the solvency and potential mismatches in individual balance sheets, while the increase in accommodation rate provides some interest rate direction.