Earnings Report /
Nigeria

FBN Holdings: Q3 19 review: Low tax rate drives better-than-expected profits; Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tellimer Research
    22 October 2019
    Published by

    FBNH’s Q3 19 pre-tax profit of NGN20.2bn (up 62% yoy) was in line with our estimate, but an effective tax rate below 1% (vs our 15% forecast) resulted in better-than-expected net income of NGN19.4bn (up 74% yoy) vs our NGN16.4bn forecast. The increase in pre-tax profit was largely driven by a sharp 63% yoy drop in net impairment charge, which we anticipated, as weaker-than-expected asset yields and non-core revenues largely drove a 26% yoy decline in pre-provision profits. Compared with Q2 19, net income was up 29% due to the low tax rate.

    NPL ratio moderated further, but loan growth lagged peers'. Gross loan volumes were up 3% qoq (vs 15% for UBA and 8% for GTB), although the declines in provisions and NPL balances suggest some loan write-offs in Q3 weighed on the trend (c2% of end-H1 gross loans, on our estimates). The NPL ratio fell 1.9ppts qoq to 12.6%, while NPL provisions fell 4ppts to 48%. We estimate that FBNH’s loan/funding ratio closed the quarter at 50% at the group level (from 48% in H1 19), lower than the Central Bank of Nigeria's revised 65% threshold for deposit money banks.

    Reiterate Buy with an unchanged TP of NGN11.00 (131% ETR). FBNH’s strong retail banking franchise continues to deliver robust e-banking revenues (up 46% yoy in 9M 19) and support non-interest revenues and margins. Valuation also remains attractive with FY 20f PB of 0.3x, vs Nigerian and frontier peers at 0.4x and 1.0x, respectively. However, FBNH’s weak operating efficiency, NPL provisions coverage and capital adequacy ratios present significant downside risks, especially given the regulatory risks and lack of clarity on the full budget for the ongoing restructuring exercise. 

    Our recently updated earnings forecasts and valuation estimates for FBNH and the rest of our Nigeria banks coverage can be found here: Nigeria Banks: Good fundamentals, but tricky technicals; Buy.

    Financial results summary

    NGNmnQ3 19Q3 18yoyQ2 19qoq

    Net interest income (NII)

    64,721

    71,886

    -10%

    72,537

    -11%

    Non-interest revenues

    32,331

    30,976

    4%

    30,598

    6%

    Total income

    97,052

    102,862

    -6%

    103,135

    -6%

    Total opex

    70,541

    67,034

    5%

    74,418

    -5%

    Pre-provision profit

    26,511

    35,828

    -26%

    28,717

    -8%

    Pre-tax profit

    20,158

    12,464

    62%

    20,474

    -2%

    Net attributable profit

    19,355

    11,121

    74%

    14,971

    29%

    Net loans

    1,819,654

    1,924,540

    -5%

    1,743,232

    4%

    Total deposits

    3,671,052

    3,383,695

    8%

    3,582,605

    2%

    NII/assets

    4.6%

    5.4%

     

    5.2%

     

    Cost/income

    73%

    65%

     

    72%

     

    ROE

    13.6%

    6.6%

     

    11.1%

     

    NPL ratio

    12.6%

    19.8%

     

    14.5%

     

    *NPL provisions coverage

    48%

    69%

     

    52%

     

    Source: Company accounts, Tellimer Research. *excluding statutory reserves