FBNH’s unaudited Q1 20 results showed a net attributable profit of NGN 24.5bn (up 61% yoy), which was attributable to impressive trading income gains (up 327% yoy) and a 30% yoy reduction in impairment charge. Net interest income was down 19% yoy, reflective of the depressed yields on both loans (up 11% ytd) and investment securities. This in turn led to a 1.7ppts compression in net interest margin despite sizable growth in interest-earning assets. On a quarterly basis, net attributable profit was up 21% yoy, bolstered by lower effective taxes.
Recommendation: Buy, TP NGN11.0
We have a Buy with an unchanged TP of NGN11.00 (143% ETR) as FBNH strives to expand its digital footprint which should produce robust e-banking revenues and support non-interest revenues and margins. Valuations are currently attractive as FBNH trades at a FY 20f PB of 0.2x, vs Nigerian and frontier peers at 0.3x and 0.7x, respectively. However, its operational efficiency and NPL provisions coverage remain weaker than peers and capital adequacy ratios present significant downside risks.
Key positives
- Non-interest income was up 327% yoy owing to gains on the sale of investment securities.
- The cost-to-income ratio improved by 2.8ppts to 65.1%, in line with management’s commitment to improving operational efficiency, leveraging on technology to lower its cost of service.
- Customer loans were up 11% qoq, which we attribute to increased credit demand as individuals and companies affected by the coronavirus pandemic and a general downturn in economic activity seek to access the CBN intervention funds.
- Asset quality continued to improve, with group NPL ratio at 9.2% (vs 9.9% in FY 19) and cost of risk falling to 1.8% (2.5% as at FY 19), as impairment charges were down 30% yoy.
Key negatives
- Net interest income was down 19% yoy, reflective of the depressed yields on interest-earning assets. Also, foreign exchange (FX) income was down 11% as large portions of the banks' FX orders were largely unfilled during the lockdown period as the CBN has been operating only essential services.
- Weak provisions coverage at 39% in Q1 20, following the write-off of legacy problem loans in 2019. However, management guided during the FY 19 call that provisions would be restored to the 60-70% range by FY 20.
| NGNm | Q1 20 | Q1 19 | yoy | Q4 19 | qoq |
|---|---|---|---|---|---|
Net interest income | 60,253 | 74,180 | -19% | 78,776 | -24% |
Net fee income | 20,773 | 19,818 | 5% | 20,645 | 1% |
Total operating income | 109,992 | 103,446 | 6% | 145,670 | -24% |
Operating expenses | 71,606 | 70,202 | 2% | 99,501 | -28% |
Pre-provision profit | 38,386 | 33,244 | 15% | 46,169 | -17% |
Net impairment charge | 9,706 | 13,847 | -30% | 19,671 | -51% |
Net profit | 23,140 | 15,885 | 46% | 21,976 | 5% |
Net attributable profit | 24,571 | 15,270 | 61% | 20,324 | 21% |
Net loans | 2,051,316 | 1,672,997 | 23% | 1,852,411 | 11% |
Total assets | 7,023,391 | 5,580,215 | 26% | 6,203,526 | 13% |
Deposits | 4,290,091 | 3,515,255 | 22% | 4,019,836 | 7% |
Net interest margin | 3.64% | 5.32% |
| 5.28% |
|
Cost/Income ratio | 65.1% | 67.9% |
| 68.3% |
|
Cost of risk | 1.82% | 2.67% |
| 4.07% |
|
NPL ratio | 9.20% | 25.3% |
| 10.2% |
|
Provision coverage | 39% | 76% |
| 40% |
|
ROTE | 15.4% | 12.0% |
| 13.5% |
|
ROA | 1.49% | 1.10% |
| 1.36% |
|