Equity Analysis /
Nigeria

FBN Holdings: Q2 19: NPLs drop amid a weak operating performance; maintain Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Ayodeji Dawodu
    Ayodeji Dawodu

    Equity Research Analyst, Industrials

    Tellimer Research
    31 July 2019
    Published by

    FBNH’s Q2 19 performance was weak, with pre-provision profit (PPP) falling 39% yoy. Net income fell more moderately by 17% yoy, due to support from a sharp drop in the cost of risk to 1.8% from 5.0% in Q2 18. The results were weighed by top-line weakness and cost pressure, which drove a 17.0ppt yoy jump in cost/income to 74%. Furthermore, the effective tax rate was much higher at 26% (up 19.0ppt yoy), likely due to the drop in net impairment charge. Encouragingly, the NPL ratio fell significantly to 14.5% from 25.3% in Q1 19, following a write-off of Atlantic Energy (cUS$400mn), although this resulted in an 18ppt qoq decline in NPLs provisions coverage to 65% and CAR of 16.8% (vs 15% prescribed by CBN) only due to a phasing of IFRS 9 provisions.  

    Maintain Buy with an unchanged TP of NGN12.00 and an ETR of 117%. FBNH’s strong retail banking franchise continues to deliver robust e-banking revenues (up 142% yoy in Q2 19) and support non-interest revenues and margins. Valuation also remains attractive with FY19f P/B of 0.3x, vs Nigerian and frontier peers’ at 0.6x and 1.1x respectively. However, FBNH’s weak operating efficiency, NPLs provisions coverage and capital adequacy ratios present significant downside risks, especially given recent proposed regulatory changes for the banking sector and lack of sufficient clarity on a full budget for the ongoing restructuring exercise.

    NPL ratio fell closer to management’s single-digit guidance for end-FY19, as the NPL stock fell 48% qoq, mainly due to significant write-offs. This also dragged provisions and the capital adequacy ratio lower qoq, and could constrain further cost of risk moderation and risk asset growth in H2 19. Headline gross loans/deposit for the group fell 6.3ppt qoq to 53%, due to the gross loan trend and a 4% qoq increase in deposits, but management expects the Nigerian bank to meet the CBN’s 60% benchmark by end-FY19 after achieving loan growth and applying the 150% weighting to retail loans. 

    Weak operating performance replaced risk charge pressures. Total operating income fell 8% yoy, as margin contraction, lower trading/FX income, and pressure on capital markets-related fees outweighed higher e-banking and net insurance income. Consequently, cost/income was elevated, also due to further pressure from a 20% yoy increase in operating expense, which management expects to remain high in H2 19. In addition to restructuring costs (8% of total opex), there were significant increases in regulatory, depreciation/maintenance and marketing costs.