October 29, 2019/InvestmentOne Report

·         Net interest income of N64.7billion, down 10.8% q/q; down 4.6% y/y

·         Non-interest income of N32.3billion, up 5.3% q/q, up 1.9% y/y

·         Profit before tax of N20.2billion,down 2.0% q/q, up 16.9% y/y

·         Profit after tax of N20.1billion, up 26.3% q/q; up 15.3 y/y 

FBNH released its 9M 2019 results last week, revealing a 16.9% and 15.3% y/y rise in PBT and PAT, largely due to the 62.6% y/y drop in impairment charges and a slight increase (1.9% y/y) in non-interest income, which offset the 16.6% y/y increase in total opex and the 4.6% y/y decline in net interest income.

On a sequential basis, PBT and PAT and came in relatively flat and up 26.3% respectively, owing to the 23.1% q/q decline in impairment charges and the low effective tax rate of 0.2% versus 22.6% in Q2 2019.

In what appears to be a trend across board, FBN’s net interest income declined 10.8% q/q, as interest margin (NIM) compressed 40bps q/q to 7.3% even as cost of funds remained flat. The decline in NIM largely reflects the increased pricing pressure induced by the CBN’s mandate to banks, ensuring they meet up with the LDR guidelines. On that note, the bank’s gross loan book was up 8.1% YtD (4.4% q/q), although still low when juxtaposed against its peers like GTB (8.0% q/q), UBA (15% q/q).

As at 9M 2019, FBN’s LDR stood at 50% (versus 48% in H1 2019), this implies that the bank would need to grow its loan book by 29% to meet up with the revised 65% LDR regulation by FY 2019. This could put some pressure on CAR which stood at 15.1% (just 10bps above the regulatory benchmark of 15%.

Furthermore, non-interest income was up 5.3%, largely attributable to the 8.9% q/q (21.6% y/y) growth in net fee and commission income and a 4x boost in investment revenue. The bank’s deposits were up 2% q/q.

Elsewhere, asset quality continued improving in the quarter, with absolute NPLs declining 10.7% q/q (54.0% YtD). By extension, NPL fell 190bps q/q to 12.6% (versus 25.9% in FY 2019). It would seem that bank is well in line to meeting the single digit NPL target in FY 2019. Also, given the outlook of a larger loan book and little expectations for further deterioration, we are of the view management would be able to deliver on its target. Similarly, impairment costs dropped 23.1% q/q (62.6% y/y), translating to a 30bps q/q improvement in cost of risk to 1.9%.

However, rising costs remains an issue, as cost to income ratio remained high at 70.9% versus 59.1% in 9M 2018, driven by the 16.6% y/y (down 5.2% q/q) rise in total expenses. Going forward, we believe cost containment should be the next area of focus for the bank.

Finally, we maintain a BUY rating on the stock, with a target price of N11.4k – implying an upside potential of 115%, based on yesterday’s close price. That said, FBNH’s weak operating efficiency and capital adequacy ratio remain a cause for concern.

Source: Company financials, Investment One Financial Services Research