May 11, 2020/InvestmentOne Report

         Net interest income of N60.25billion, down 23.51%q/q , down 15.92%y/y

·         Non-interest income of N54.78billion, down 18.47%q/q, up 83.15%y/y.

·         Profit before tax of N28.68billion, up 5.85%q/q, up 61.45% y/y.

·         Profit after tax of N23.14billion, down 9.27%y/y, up 59.33%y/y. 

Lower Impairment Supports q/q performance

In Q1 2020, FBNH reported a 5.85%q/q improvement in PBT in its unaudited result. This was driven by the lower impairment charges reported in the quarter which fell by 57.19%q/q to N9.71billion. We highlight that Net Interest Income (NII) and Non-interest Income fell by 23.51%q/q and 18.48%q/q respectively in Q1 2020. We believe the drive to boost loan book could have caused the bank to reduce its exposure to government instruments thus reducing interest income from government instruments. Similarly, the bank could have reduced its loan to other banks as most banks try to boost the loan to the real sector. This reflected on the Interest Income from banks which fell by 80.67%q/q to N2.50billion in Q1 2020. Net Interest Margin stood at 6.3% compared to 7.7% in both FY 2019 and Q1 2019. We opine that this was due to lower interest rate environment compared to 2019. Similarly, we think the drive to boost loan book could have caused the bank to lower its interest charges as competition for quality assets intensifies. On the other hand, we believe the recent downward review of bank charges on online transactions could have reduced the banks fees. In the same vein, we are of the view that the recent sell-offs in the Fixed Income market could have caused the bank to record 65.70%q/q decline in gains on Financial Instruments. 

Jump in Non-interest Income Improves Earnings

On a y/y basis, Net Interest Income was down 15.92%y/y to N60billion while Non-interest income jumped 83.15%y/y to N54.78billion. While the bank’s drive to improve its digital channels could have caused the increase in its net fees and commissions (+6.82%y/y), we believe the increase in capital gains from financial instruments could have caused the improvement in Non-interest income as the bank recorded jumps in both Investment securities (N1.59billion in Q1 2019 vs N13.50billion in Q1 2020) and Financial Instruments (-N307million in Q1 2019 vs N8.34billion in Q1 2020). Resultantly, the bank’s Profit Before Provisions and OPEX rose by 12.25% y/y to N109.99billion.  

Despite the 7.88%y/y increase (down 19.90%q/q) in OPEX, cost to income ratio declined by 260bps y/y to 65.10% in Q1 2020 as the growth in income offset the increase in operating expenses. Similarly, this was below Cost to Income ratio of 70.0% recorded in FY 2019. Nonetheless, the bank’s Cost to income ratio is still one of the highest among the tier 1 players. Cost of risk improved to 1.9% from 2.7% a year ago. Overall, PBT jumped 61.45%y/y to N28.68billion in Q1 2020. 

Asset Quality Continues to improve

Elsewhere, the bank’s NPL ratio fell to 9.2% compared to 9.9% in FY 2019 and 25.3% in Q1 2019 as net loan book rose by 10% year to date. However, going forward we expect to see a deterioration in asset quality as the impacts of the current pandemic materialize. While the current CBN’s drive to boost credit to the real sector remains, we expect the pandemic to have negative significant effects on the overall economy particularly on oil price and Oil & Gas sector. We highlight that overall banking sector loan to Oil & Gas (upstream) was around 19.9% while First bank’s exposure to upstream oil and gas was 17.9% (of its loan book) as at December 2019. As a result, we do not expect First bank as well as other banks to boost loan book in 2020. In our view, we think banks will rather focus on risk management strategy in 2020. As such, we think the bank’s current LDR ratio of 49.6% may not reach 65% target of the CBN at the end of 2020.  

Weak Outlook

With the recent devaluation, we see potential extra earnings for FBNH given its net positive position in major foreign currencies (Net Positive FCY of N94billion based on our estimate from its FY 2019 result).  

Overall, with the current pandemic which is a major risk to banks, we opine that FBNH may be negatively affected by the looming storm given its weak capital base (CAR of 15.3%) which is slightly above the regulatory requirement of 15.0% (16% for Systemically Important Banks). While we recognize the efforts made to reduce its cost to income ratio and cost of risk, we believe the bank should still improve its operational efficiency in order to support its profitability. Nonetheless, we believe the bank’s position as one of the Systemically Important Banks could help it to remain resilient in a challenging macroeconomic environment like this. We see the bank’s drive to boost its digital channels through its FirstMonie to support Non-interest income in the near term.

FBN HOLDINGS PLC Q1 2020 (YE: DEC) (N millions)

Source: Company financials, Investment One Financial Services Research