August 6, 2020/United Capital Report
Earlier, FBN Holding Plc (“FBNH” or “The Bank”) released its unaudited H1-2020 financial result, showing a 5.8%y/y expansion in Gross Earnings (GE) to N296.4bn. Notably, the Bank reported a decent top-line growth despite pressure on economic activities triggered by the coronavirus pandemic. Interest income, however, fell 7.4%y/y to N131.3bn amid hesitant asset yields. More interestingly, PBT and PAT, sustained strong uptrend, surging 14.3%y/y and 56.3%y/y to N41.4bn and N49.5bn, respectively. We review the H1 earnings and adjust our expectations for FY-2020 below.
Non-interest income surged 46.8%y/y: FBNH’s GE growth was mainly driven by Non-interest income which jumped 46.8% N80.1bn. Though Interest income was dragged by lower asset yield (at 10.8% in H1-2020 vs. 11.4% in H1-2019), management insisted that strong performance from its agency banking business supported the Non-interest income. Specifically, the bank reported that agent banking grew by over 100%, tallying at 59,024 agents compared to 27,476 in H1-2019. Additionally, fees, commission, and gains on investment securities further buoyed Non-interest income growth. Net interest income fell 7.4% to N131.3bn as a reduction in the cost of funds to 2.8% was unable to offset pressure on asset yield. Accordingly, Net income margin moderated to 6.8% compared to 7.5% in the corresponding period.
Notably, loan loss expense rose sharply to N30.7bn (vs N22.1bn in the prior year). According to management, this was driven by the translation impact of foreign currency loans and the weak macro environment. However, NPL ratio continued to slow, down to 8.8% compared to 9.9% in the prior period. Also, Cost-to-Income ratio slowed to 65.1% (vs. 70.3% in H1-2019). This was supported by a stable OPEX line which firmed at N139.3bn (up 0.9% y/y) relative to 7.7% y/y expansion in operational income. Supported by cost savings and faster non-interest income, PBT grew 14.3% to N41.4bn, meanwhile PAT surged 56.3% y/y to N49.3bn due to N13.8bn gain in discontinued operations following the sales of 65.0% stake in FBN Insurance Ltd. during the period. As such, after-tax ROE and ROA improved to 14.5% and 1.5% (vs. 11.2% and 1.1%) respectively.
NPL ratio slows to 8.8%, CAR up 120bps: Net customer loans and advances rose 7.7%Ytd to N2.0tn despite increased default risk in the macro environment, but management insisted that credit were originated mainly in sectors such as manufacturing, food processing and Agro-based businesses, including telecom, which are not broadly exposed to the negative impact of COVID-19. As noted above, NPL fell to 8.8%, we suspect that this was driven by writebacks from legacy NPLs amid sustained efforts to recover previous write-offs. However, a further inspection of NPL by sector indicated that improvement in NPLs related to Agric, Real estate, Manufacturing and Others, may have more than offset pressure from Upstream Oil & Gas, as well as General Commerce related NPLs. Yet, Cost of risk rose to 3.1% reflecting the spike in impairment losses due to FX and macro pressures.
Amid rising uncertainties in the horizon and to forestall unforeseen spike in NPLs by year-end, FBNH injected a fresh Tier-1 capital into First Bank Ltd (the commercial banking division), resulting in a 120bps increase in CAR to 16.5%. Notably, this is a direct impact of the 65% divestment from FBN Insurance. Meanwhile, CAR for the merchant banking division remained broadly stable. We think the above move is brilliant, suggesting that the bank has not only learnt from its recent experience but also seemed prepared to withstand unexpected balance sheet pressures. Overall, FBNH’s balance sheet position looks reasonably healthy amid the sustained increase in customer deposits, up 8.8%Ytd to N4.3tn. This puts net loan to deposits at 49.5%, implying that liquidity remains strong .
Positive Outlook despite tighter macro and regulatory environment: We are of the view that strong non-interest income growth, buoyed by agent banking and other e-business income, as well as improvement in OPEX indicates that FY-2020 number will remain resilient. More importantly, the improved capital adequacy ratio, buoyed by divestment from the insurance business indicates that FBNH should be able to withstand possible asset quality pressure by year-end, considering that the H1 numbers are not audited. As such, we expect pre-tax profit to print a high single to low double-digit growth by FY-2020. However, this may not translate into a spike in dividend pay-out considering the need to shore up capital base, as indicated by the capital injection noted above. Notably, FBNH’s P/B and P/E ratios settled 0.3x and 2.2x compared to peer (Tier-1) average 0.6x and 2.6x respectively. As such, we maintain a BUY rating on FBNH but revise our year-end TP to N6.5, due to increased market risk as well as poor sentiment for riskier assets. Compared to the current price of N5.05/share this translates to an upside of 28.7%.
Click here to read full PDF copy of report
