Earnings Report /
Nigeria

FBN Holdings: Q1 2020 results – Profits bolstered by trading gains and lower impairment charge

  • Profits up 62% yoy as non-interest income supports earnings

  • Loans up 11% ytd as customers try to access the CBN intervention funds

  • Continued improvement in NPL (9.2%) but provisions (39%) remains weak

Nkemdilim Nwadialor
Nkemdilim Nwadialor

Equity Research Analyst, Financials

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Tellimer Research
21 April 2020
Published byTellimer Research

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

  1. Non-interest income was up 327% yoy owing to gains on the sale of investment securities.
  2. 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.
  3. 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.
  4. 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

  1. 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.
  2. 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.

Table 1: Q1 20 results summary
NGNmQ1 20Q1 19yoyQ4 19qoq

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%

 

Source: Company financials