Equity Analysis /
Nigeria

FBN Holdings: Asset quality risks persist, but CBN forbearance helps

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Contributors
    Rahul Shah
    Ayodeji Dawodu
    Tellimer Research
    16 April 2019
    Published by

    FY 18 EPS rose 43% yoy to NGN1.65, significantly ahead of our expectations for a loss, due to the lower-than-expected risk cost of c3.7% versus our 7.0% forecast (and management’s 6-7% guidance). Pre-provisions profits fell 26% yoy, in line with our estimates, weighed by lower net interest income and higher operating expenses, which offset strong non-interest revenue (NIR) growth. Key negative surprises were the rise in the NPL ratio to 25.9% (from 19.8% in 9M 18) and the jump in IFRS 9 adjustments to NGN212bn (31% of opening equity balance) from NGN28bn previously disclosed. Encouragingly, the CAR only fell by 0.4ppt yoy to 17.3%, due to the CBN’s forbearance, which allows IFRS 9 adjustments to be applied to the capital base over four years.

    Raising medium-term estimates; reiterate Buy with a lower TP of NGN12.00 (previously 14.50). We remain positive on lower risk charge tailwinds and a pickup in profitability materialising over the medium term, and raise our FY 19f-21f EPS and ROA forecasts by 17% and 0.2ppt on average (see table 2); our FY 22f-23f estimates are largely unchanged. Additionally, we continue to like FBNH’s strong retail banking franchise, which delivered stronger-than-expected e-banking revenues in FY 18 and should continue to support margins and NIR. Our forecasts also incorporate higher operating expenses, lower loan volume and weaker asset yield estimates, as those surprised to the downside in FY 18. Our lower target price reflects a 58% cut to our FY 19f-21f DPS estimates due to the higher-than-expected IFRS 9 adjustments to equity and capital. FBNH trades at FY 20f P/B of 0.4x versus frontier bank peers at c1.3x.

    The key downside risk to our rating remains FBNH’s weak asset quality position. However, with the CBN’s transitional arrangement on implementing IFRS 9 now in place, we think FBNH is better positioned to resolve its bad loan issues over the next three years from a capital stand point (a full IFRS 9 implementation would have resulted in FY 18 CAR of 10.7%, which is much lower than the 16% threshold). Additionally, the largest NPL (Atlantic Energy, US$400mn) was fully provided for in Q4 18, which partly explains the 26% qoq rise in the provisions balance and the increase in the NPLs provisions coverage to 72% (from 69% as at 9M 18). We expect the CAR to remain above the regulatory floor over our forecast period, even with additional provisions expected in the near term. However, we see the possibility for the write-off of long-outstanding NPLs to be delayed, and expect the NPL ratio to remain elevated at 15.0% by end-FY 19f before falling to 8.0% by end-FY 21f.

    Solid fee and insurance income growth should continue to drive NIR. NIR was up 16% yoy in FY 18, largely due to impressive net fees and commissions and net insurance income, which rose 26% yoy on aggregate. We expect these revenue lines to grow by 22% pa in FY 19f-21f, as they rise to account for 82% of NIR, from 68% in FY 18. Net interest income, which fell 14% yoy in FY 18 due to lower asset yields and loan volumes, should recover by 6% pa in FY 19f-21f as loan growth picks up.

    Operating efficiency was weaker in FY 18, but should improve in FY 19f-21f. Operating expenses rose 10% yoy in FY 18, driven by higher staff costs, regulatory fees and other general operating expenses. This, in addition to the 7% decline in total revenues, contributed to a 9ppt rise in the cost/income ratio to 63%. We expect a moderation in the cost/income ratio to 56% by FY 21f, largely driven by strong top line growth of 9% pa in FY 19-21f, which should outweigh a 5% pa increase in operating expenses.