Fixed Income Analysis /

FBN Holdings: Q1 review – Making progress, Hold

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    1 May 2019
    Published by

    Still making progress: We reiterate our Hold recommendation on the First Bank of Nigeria (FBNNL) 8% 2021 subordinated bond. The yoy rise in costs in Q1 was disappointing. However, we note that costs actually declined qoq and FBNNL’s cost/income ratio was better than in Q4 18. Asset quality remains a key focus for this bank, and management is confident that the YE 2019 target of a single-digit NPL ratio will be achieved. We think this continued focus on asset quality is credit positive. As discussed in our previous report, the Group has now fully provisioned against its largest problem loan. Management highlighted that all other NPLs account for less than 1.5ppts of loans. We continue to think that the decisive actions taken in the final part of 2018 pave the way for a potential return to the bond market by FBN, for the first time since 2014. 

    Higher ROE than in Q1 18: Net income of over NGN15bn in the first quarter of this year was up versus Q1 18, despite a significant yoy rise in costs. Strong non-interest income and much lower provisions drove the yoy improvement in the bottom line. The ROE exceeded 11%, up from 8.5% a year ago. Overall, there were some improvements, but as the Group itself acknowledged, there is still a lot to do.

    Solid non-interest income drove yoy growth: Operating revenue of NGN103bn was 4% higher than in Q4 18 and Q1 18. Net interest income was 2% lower than a year ago, partly due to decreased volumes. However, net fee and commission income increased significantly, driven by electronic banking fees and by higher account maintenance and credit-related fees. FBN also disclosed NGN3.1bn in gains on investment securities, up from NGN837mn a year ago; and dividend income rose to almost NGN2bn from NGN12mn in Q1 2018, reflecting a dividend payment from AFC.

    Marked yoy increase in costs: Operating expenses exceeded NGN70bn in the first quarter, which was almost 30% higher than a year ago. Higher regulatory costs, digital banking and IT-related expenses and personnel retrenchment costs drove the yoy increase. We note that costs declined 6% qoq. The cost/income ratio was almost 68%, which was much higher than in Q1 18 but an improvement on the 75% ratio reported in the fourth quarter of last year. Management expects costs to moderate through the course of the year and sees the cost/income ratio improving by year-end.

    Significant drop in NPL ratio expected: Unsurprisingly, questions about asset quality dominated the Group’s most recent results call. The Group stated that a more conservative approach to IFRS 9 adoption led to an increase in loans classed as non-performing in the final quarter of 2018. By the end of Q1, the NPL ratio had improved slightly – to 25.3% from 25.9% and the coverage ratio was over 82% (YE 2018: 78%). Management is confident that with a combination of recoveries, restructuring, loan growth and write-offs, the NPL ratio can improve to <10% by the end of this year. The Group noted that apart from Atlantic Energy, no other NPL accounts for more than 1.5ppt of gross loans. Importantly, the exposure to Aiteo is no longer classified as non-performing and FBN continues to resolve other problem exposures, including Ontario Oil and Gas (part of that exposure has been written off).