Culled—Proshare

May 1, 2018/Vetiva Research 

Highlights of Vetiva Analyst Report
• Earnings lag estimates – PAT down 9% y/y
• Higher than expected loan loss provisioning drags bottom line
• Lower than expected one-time charge from IFRS 9 implementation 
• Loan loss provision revised higher to reflect Q1’18 run rate

Earnings Lag Estimates – PAT Down 9% y/y
FBNH released its Q1’18 results, posting weaker than expected performances across most line items. Particularly, Gross Earnings moderated 2% y/y to ₦139 billion – weaker than prior quarter’s ₦154 billion and our ₦153 billion estimate. The unconvincing top line performance was driven by weaker than expected performances from both Interest and Non-Interest Income lines.

Whilst Non-Interest Income rose by a marginal 1% to ₦23.6 billion, the income line was 27% and 40% lower than our ₦32.4 billion estimate and prior quarter’s ₦39.5 billion. Also, Interest Income moderated 3% y/y and 2% q/q to ₦111 billion – missing our ₦120 billion estimate. With Interest Expense coming largely in line with our estimate at ₦35.2 billion, Net Interest Income was down 6% y/y to ₦75.7 billion (below our ₦85.5 billion estimate).

In line with the trend observed across most banks in Q1’18, we had expected the implementation of IFRS 9 to result in a significant one-time write off from earnings at the beginning of Q1’18 and a more tempered loan loss provision for the period. However, the initial application of IFRS 9 resulted in a more contained charge of ₦36.1 billion vs. the average ₦95.5 billion recorded by other tier 1 banks.

Consequently, FBNH reported a loan loss provision of ₦25.3 billion vs. our ₦11.1 billion estimate. With this, Operating Income came in flat y/y at ₦74 billion – albeit significantly weaker than our ₦107 billion estimate. Furthermore, with Operating Expense coming in at ₦55.2 billion – better than our ₦64.9 billion estimate, PBT was down 6% y/y to ₦18.8 billion – significantly missing our ₦41.9 billion estimate. Overall, PAT was down 9% y/y to ₦14.8 billion – behind our ₦35.2 billion estimate.

TP Revised to N12.82 (Previous: N15.88)
We have revised our estimates across most line items to reflect the earnings miss. Most notably, we raise our loan loss provision to ₦121 billion (Previous: ₦44.3 billion) following Q1’18 trend and in line with management guided cost of risk of 6.0%. Also, with the one-time write-off coming in lower than we had expected, we raise our loan growth forecast marginally higher to 3% (Previous: 0%). 

Despite this, we cut our Interest Income estimate to ₦449 billion (Previous: ₦481 billion) following weaker than expected Q1’18 run rate. Similarly, we revise our Non-Interest Income estimate lower to ₦110 billion (Previous: ₦130 billion). 

Hence, we revise our Gross Earnings estimate to ₦550 billion (Previous: ₦610 billion). With Operating Expense coming in 15% better than we had estimated for Q1’17, we lower our Operating Expense estimate to ₦218 billion (Previous: ₦250 billion) – translating to a cost to income ratio of 53%. Overall, we revise our PAT estimate lower to ₦58.3 billion for FY’18 – translating to an EPS of ₦1.62. 

Consequently, our Target Price (TP) is revised lower to ₦12.82 (Previous: ₦15.88) – FBNH trades at FY’18 P/B and P/E ratios of 0.6x and 7.7x vs. Tier I averages of 1.0x and 4.7x respectively.  

About Analyst/Author
Olalekan Olabode  o.olabode@vetiva.com