July 30, 2021/CSL Research
FBNH released H1 2021 UNAUDITED numbers, which showed a 22.4% y/y decline in Interest Income mainly on the back of a decline in yields on investment securities and Net Loans. Q/q, however, Interest Income was up 5.5% in Q2 relative to Q1 2021. Interest Income on investment securities declined 56.3% y/y while Interest Income on Net Loans declined 6.2% y/y. The bank’s Net Loans were up 27.3% y/y and 14.5% in H1 2021 compared with December 2020. Investment securities grew 49.0% y/y and 14.8% in H1 2021 compared with December 2020. The decline in Interest Income reflects a low-interest rate environment, but we had expected that the increased yield on fixed income instruments would support Interest Income growth.
On the other hand, Interest Expense was down 24.9% y/y mainly due to a significant decline in Interest on Customers and bank deposits reflecting reduced funding cost. Interest Expense on the bank’s borrowings however significantly grew y/y. Customer Deposits grew 16.1% y/y but were only up 3.7% in June’s relative to December 2020. Overall, Net Interest Margin was down to 4.4% in H1 2021 compared to 6.8% in June 2020. We expect to see an increase in funding costs for banks as the interest rate environment gradually moves higher.
Net Fee and Commission Income grew significantly (up 22.7% y/y and 1.8% q/q). We laud the bank’s efforts to grow Fee and Commission Income in light of the current macro situation and the cut to electronic banking fees implemented at the start of 2020. Growth in Fees and Commission was mainly on the back of a 73.0% growth in credit related fees, a 74.5% growth in Letters of credit fees and commissions, a 41.9% growth in account maintenance fees and a 62.1% growth in funds transfer and intermediation fees. E-banking fees remained resilient, up 32.7% y/y despite the steep cut to fees on such transactions.
Other Income (Foreign Exchange Income, Net Gains on Investment Securities, Net Gains or Loss on Financial Instruments held at FVTPL, Dividend Income, Other Operating Income) was up 83.8% y/y. The significant y/y growth was mainly on the back of fair value gains of N22.2bn compared with only 6.5bn in H1 2020 and sundry income of N15.1bn compared with N1.3bn in June 2020, almost all of both incomes came in during Q2.
Impairment Charge declined 20.0% y/y to N24.5bn in H1 2021 compared with N30.7bn in H1 2020, bringing annualised Cost of Risk (COR) to 2.0% compared with 2.4% for FY 2020. Many banks restructured loans from the strained sectors. The management noted at the H1 2020 conference call that 15% of the loan book had been restructured. We assume that the slight improvement in macro conditions and the gradual opening of the economy, including increasing oil prices, means that many loans to the strained sectors should show gradual improvement. NPL ratio of 7.2%, down from 8.8% in June 2020.
OPEX increased moderately, up 9.6% y/y and 8.1% q/q. The y/y growth coupled with slower growth in total operating income (up 5.3% y/y) led to a deterioration in the cost to income ratio (ex-provisions) to 68.6% from 65.8% in H1 2020. We consider the growth in OPEX moderate considering a high inflationary environment and depreciation of the currency. Growth in Other Operating Expenses was the major contributor to OPEX growth, mainly driven by increased regulatory cost.
Pre-tax profit was down 9.2% y/y while Net Profit from continued operations was up 6.9% y/y. However, a loss of N44m from discontinued operations in H1 2021 compared with a profit of N13.8bn in H1 2020 led to a 23.1% y/y decline in profit for the period bringing H1 2021 annualised RoAE to 9.9% compared with 14.5% in June 2020.
The bank reports 15.7% Basel 2 CAR for FirstBank Nigeria.
We have a Buy rating on the stock with a target price of N12.13/s. Current price: N7.40/s.
FBN Holdings will host earnings call on Monday 02 August 2021 at 3:00 pm UK / 3:00 pm Lagos / 10:00 am New York / 4:00 pm Johannesburg & Cape Town to discuss the numbers.
