Earnings Report /
Nigeria

FBN Holdings: FY 19 results – lower taxes drive better-than-expected profits

  • Pre-provision profit was down 11% yoy owing to lower than expected interest income and higher operating expenses

  • Asset quality improves with as NPL ratio almost at single digit

  • Weak operating efficiency and capital ratios could hamper growth

Nkemdilim Nwadialor
Nkemdilim Nwadialor

Equity Research Analyst, Financials

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Tellimer Research
7 April 2020
Published byTellimer Research

FBN Holdings (FBNH) reported FY 19 net profit of NGN69.9bn (up 21% yoy) and 12% above our estimate, which we attribute to a lower effective tax at 12% (vs our estimate of 20%). However, pre-provision profit was down 11% yoy driven by an 18% yoy rise in operating expenses, which drove a 6.2ppt yoy jump in cost/income to 70% and flat net interest income on account of weaker-than-expected asset yields. Compared with Q3 19, net income was up 41% due to the improved trading gains on investment securities. Encouragingly, the NPL ratio fell significantly to 10.2%, from 25.3% in FY 18, owing to significant write-offs during the year and resulting in a 7.8ppt qoq decline in NPLs provisions coverage to 40%. FBNH proposed a dividend of NGN0.38, which represents a dividend yield of 10%.

We have a Buy with a TP of NGN11.00 (129% ETR) owing to FBNH’s strong retail banking franchise, which continues to deliver robust e-banking revenues and support non-interest revenues and margins. FBNH’s valuation also remains attractive with FY 20f PB of 0.2x, vs Nigerian and frontier peers at 0.3x and 0.7x, respectively. However, the bank's weak operating efficiency, NPL provisions coverage and capital adequacy ratios present significant downside risks. 

Other positives 

  1. Non-interest income was up 21% yoy, largely due to improved fee income owing to a surge in electronic transactions during the year and trading gains on investment securities.
  2. Asset quality improved by 2.4ppts qoq, bringing the NPL ratio down to 10.2% and nearly achieving the banks single-digit NPL target as the bank continues its risk management overhaul on its lending activities. 

Key negatives

  1. Loans were relatively flat qoq, recording a 2% uptick owing to a weaker capital ratio of 15.5% (vs 15% prescribed by the Central Bank of Nigeria), but this was only due to a phasing of IFRS 9 provisions, taking the full impact CAR is well below the minimum at 11.2%.
  2. Increased operating costs saw cost/income ratio surge 6.2ppts yoy to 70% , which is one of the weakest within our Nigerian tier 1 coverage.
  3. Net impairment charge was up 80% qoq, which resulted in a 1.2ppts increase in cost of risk to 2.7% (vs our 2.0% estimate).


Table 1: FY 19 results summary
NGN mnFY 19FY 18yoy9M 19qoq
Net interest income290,2142853212%211,43837%
Fee income83,84775,39411%63,20233%
Other operating income75,24256,60233%35,567112%
Total operating income449,303417,3178%310,20745%
Operating expenses314,662266,02218%221,73542%
Pre-provision income134,641151,295-11%88,47252%
Net impairment charge51,13387,465-42%28,46080%
Net attributable profit69,91857,69221%49,59441%
Net loans1,852,4111,670,47611%1,819,6542%
Deposits4,019,8363,486,69115%3,671,05210%
NII margin4.93%5.28%
4.60%
Cost/income ratio70.0%63.7%
71.5%
ROE11.75%9.59%
13.60%
NPL ratio10.19%25.37%
12.60%
NPL coverage40%72%
48%
Cost of risk2.65%3.73%
1.47%
CAR15.5%17.3%


Source: Company accounts