Equity Analysis /
Nigeria

FBN Holdings: Operating cost pressure drives earnings miss; but we reiterate Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Contributors
    Rahul Shah
    Ayodeji Dawodu
    Tellimer Research
    29 April 2019
    Published by

    Q1 19 net income rose 6% yoy to NGN15.2bn, but was below our NGN20.4bn forecastThe key reason for the earnings miss was a 27% yoy spike in operating expenses, largely driven by unexpected restructuring costs at cNGN5.1bn. There were also increases in regulatory expenses, personnel costs and underwriting expenses. That being said, the bottom line growth was on the back of: 1) a 45% yoy decline in the net impairment charge; 2) a 24% yoy increase in net fees and commissions; 3) significant dividend income of NGN2.0bn; and 4) a surge in trading/investment gains. These outweighed a slight 2% yoy decline in net interest income due to a decline in asset yields, lower insurance premium revenue and a drop in net FX gains. 

    Reiterate Buy with an unchanged TP of NGN12.00 and 69% ETR. We like FBNH’s strong retail banking franchise, which delivered better-than-expected e-banking revenues in Q1 19 (up 83% yoy) and FY 18 (up 36% yoy), and should continue to support non-interest revenues and margins. To support its retail dominance, FBNH has sustained full operations across the country, acquired over 10mn digital banking customers, and successfully expanded its agent count from under 400 at end-FY 17 to 20,000. FBNH trades at FY 20f PB of 0.4x versus frontier peers at c1.3x. Our top picks within Nigeria banks are GTB and Zenith

    NPL ratio is still high at 25.3% (but down 0.6ppts versus end-FY 18), as gross loan volumes were flat and NPLs fell by 2% qoq. NPLs provisions coverage improved by 4ppts qoq to 82%, while CAR fell by 0.8ppts to 16.5% (based on CBN’s transitional arrangement on IFRS 9). There are no current plans for a Tier 1 capital raise, although long-term funding requirements are still being considered. Management guided to a single-digit NPL ratio by end-FY 19, but we see the possibility of continued delays on NPL write-offs, and forecast 15.0% by end-FY 19f and 8.0% by end-FY 21f.

    Restructuring costs might recur. There was no clear guidance from management on the costs to be incurred on the restructuring, which aims to reduce headcount and improve the digital banking franchise (through branch upgrades and IT infrastructure enhancement). Hence, we see downside risks to our current outlook on near-term efficiency, as we await greater clarity on the impact on profitability. Meanwhile, AMCON charges jumped by 23% yoy – a similar trend to peers – while personnel costs rose by 12% yoy.