Sept 6, 2016/InvestmentOne Research

Downgrade to a SELL despite +64.9% increase in PBT forecast on FX gains.

Following FBNH’s Q2 2016 results which showed a +8.1% q/q improvement in PBT, we raised our 2016E PBT forecast by +64.9% to reflect the FX gains on revaluation. The increase in FX gains offset our expectation of further loan impairment charges. In our view, given that c.50% of the bank’s NPLs are in foreign currency, we believe the likelihood of further loan impairment charges are high given the upward pressure on the local currency. However, we opine that the increase in loan impairment charges may not lead to a significant improvement in NPL coverage as management remain optimistic that negotiations on two major exposures may lead to N50-100bn in recoveries before year end. Although the improvement in earnings pushed our ROE forecast up to 9.2%, from 6.4% previously, a +200bps increase in our risk free rate assumption lowered our target price by -30.5% to N3.06, implying a downside of -3.00%.

Surge in FX gains offsets spike in loan impairment charges.

FBNH’s Q2 2016 results showed PBT up +8.1% q/q due to a +232% q/q surge in other banking income. This more than offset the combined impact of a +348% q/q jump in loan impairment charges; a +3.9% q/q rise in opex and a -2.7% q/q decline in net interest income. The bank’s performance was reflective of the floating of the interbank market as the significant improvement in other banking income was largely driven by the spike in net gains on FX to N51.5bn in Q2 2016 against N1.4bn in Q1 2016. Also, the depreciation of the local currency also contributed to the increase in loan impairment charges. We highlight that the bank has now taken N69.9bn in loan impairment charges so far this year, following the N119bn recorded in 2015, which was the highest amongst its peers.

Going forward, we remain concerned that the bank’s risk management and consequently its asset quality issues may be a drag on its performance in the immediate. This is premised on the bank’s NPL ratio which stood at 22.8% at the end of Q2 2016, considerably above the 5% regulatory threshold while coverage was just 41.5%, compared to over 100% amongst its competitors.

 Click here to download FBN Holdings Plc Q2 2016 Earnings Review