August 7, 2024/United Capital Report

First Bank Nigeria Holdings (FBNH) Plc released its H1-2024 results, showing that Gross Earnings (GE) grew 2.2x to settle at N1.4tn compared to the N641.0bn in the corresponding period of 2023. The top-line growth was driven by increases in its Interest Income and non-Interest Income, which grew by 155.4% y/y and 71.0% y/y, respectively. Overall, profitability improved as Profit Before Tax (PBT) and Profit After Tax (PAT) grew by 100.9% y/y and 93.7% y/y, respectively. We review the H1-2024 earnings below and highlight our expectations for the rest of the year. 

Elevated Interest Rate Environment Improved Earnings
FBNH’s Interest Income expanded from N371.1bn to N947.7bn due to the 182.8% y/y increase in interest earned on investment securities (H1-2024: N307.0bn; H1-2023: N108.6bn), given the elevated interest rate environment in the country. Notably, the Monetary Policy Committee (MPC) hiked the benchmark interest rate by a cumulative of 750bps in H1-2024 to settle at 26.25% (previously, 18.75%). Additionally, the 131.8% y/y growth in interest earned from loans and advances to customers spurred the advancement in interest income. This is on account of the 42.4% y/y growth in the Bank’s loan book to customers, which settled at N9.1tn in the period under review. Thus, the Group’s Earnings Yield climbed to 14.1% in H1-2024, up 500bps from 9.1% in H1-2023.

However, we saw a significant jump of 219.0% y/y in Interest Expense from N135.7bn in H1-2023 to N432.8bn in H1-2024. Notably, the Group’s Cost of Funds rose by 250bps from 2.7% in H1-2023 to 5.2% in H1-2024. This is on the back of the 189.7% y/y increase in interest paid on deposits from customers from N93.6bn in H1-2023 to N262.7bn in H1-2024. The Group’s deposits grew by 42.7% to N17.8tn in the period under review from the N12.5tn recorded in Dec-2023. Nevertheless, FBNH’s Net Interest Margin (NIM) rose to 7.7% 5.8% as Net Interest Income (NII) expanded by 118.7% y/y to N514.9bn in H1-2024.

For non-Interest Income, the bulk emanated from net gains from financial instruments at fair value through profit and loss, as it grew by 89.5% y/y from N228.0bn in H1-2023 to N432.2bn in H1-2024. Additionally, the 49.1% y/y climb in net fees and commission income generated to N110.8bn in H1-2024 (previously, N72.0bn) supported the growth in Non-Interest Income. This is due to the 168.1% y/y and 87.1% y/y increase in credit-related and account maintenance fees. Noteworthily, the Group declared Foreign Exchange (FX) losses of N165.0bn in H1-2024 (due to revaluations), up 68.2% y/y from the loss of N98.1bn declared in the corresponding period of 2023.

On efficiency, Operating Expenses grew by 95.0% y/y from N228.5bn in H1-2023 to N445.7bn in H1-2024, buoyed by the nation’s heightened inflationary pressures and deteriorating macroeconomic conditions. Personnel expenses and depreciation rose by 110.0% y/y and 111.3% y/y to N134.42bn and N30.5bn, respectively. Additionally, the 63.2% y/y increase in the AMCON surcharge to N77.3bn contributed to the rise in operating expenses. Nevertheless, the Group tried to manage its efficiency as operating income expanded by 94.0% y/y from N490.1bn in H1-2023 to N950.6bn in H1-2024. However, FBNH’s Cost-to-Income Ratio (CIR) fell by 25bps from 46.6% in H1-2023 to 46.9% in the period under review.

Overall, First Bank Nigeria Holding Plc recorded an improvement in its profitability as the Bank’s PBT and PAT rose by 100.9% y/y and 93.7% y/y to N412.0bn and N360.3bn, respectively. As a result, the Group’s Earnings Per Share (EPS) grew 94.7% y/y from N5.19k in H1-2023 to N10.11k. Lastly, the trailing 12-month Return on Average Equity (ROAE) rose by 540bps to 36.9% in H1-2024, previously 31.5% in H1-2023.

Adequate Provision for Possible Bad Loans
FBNH’s total assets expanded by 38.3% from N16.9tn in FY-2023 to N23.4tn in H1-2024, supported primarily by loan book growth. The Group’s total loans and advances climbed by 45.6% from N8.4tn in FY-2023 to N12.2tn in H1-2024. As a result, the Loan-to-Deposit Ratio (LDR) improved by 138bps to 68.9%, well above the Central Bank’s regulatory minimum of 65.0%. Additionally, investment securities settled at N12.2tn in H1-2024, up 43.3% compared to the N8.4tn recorded in FY-2023.

Regarding asset quality, FBNH’s Non-Performing Loan (NPL) ratio slightly improved to 4.2% in H1-2024 from 4.3% in the corresponding period of 2023. Impairment charges for the period climbed by 64.0% y/y to print at N93.0bn, as the Group’s NPL coverage ratio printed at 96.5% (previously, 82.2% in H1-2023). This implies that FBNH is making enough provisions for imminent bad loans. As a result, the Group’s Cost of Risk surged from 1.9% in H1-2023 to 2.3% in the period under review.

Lastly, the shareholder’s fund of the Group grew by 26.7% y/y from N1.7tn in FY-2023 to N2.2tn in H1-2024 following improved business activities. Consequently, the Group’s Book Value Per Share (BVPS) rose to N61.7k in H1-2024 compared to its print of N38.4k a year ago.
 
Outlook: Profitability Performance is Expected to be Sustained
Going forward, we expect a sustained expansion in First Bank Nigeria Holdings Plc’s topline growth, following growth in interest and non-interest incomes. We anticipate that the elevated interest rate environment will keep supporting higher income earned on interest-bearing assets. Conversely, we note that this may result in higher interest expenses on customers’ deposits, thus weighing on the Group’s overall Net Interest Margin (NIM).

Additionally, we expect sustained growth in the Group’s non-interest income in H2-2023, arising from higher returns on trading financial instruments despite FX losses. This will ensure overall profitability for First Bank Nigeria Holdings Plc. However, we note that challenges in the form of tough regulatory, monetary, and macroeconomic environments may serve as potential headwinds to the Group’s revenue growth. In addition, we expect rising inflationary pressures to continue to weigh on operational efficiency and overall profitability.

On policy reforms, the Senate has approved an amendment to the Finance Act, which accommodates a 70% windfall tax on bank’s FX gains. We do not expect this to majorly impact on the Group’s profitability. This is hinged on the fact that the Group is currently incurring losses on FX, as evidenced in their result (H1-2024: -N165.0bn). This should imply that FBNH would not be charged on its losses.

Lastly, the Central Bank released a directive for Nigerian banks to increase their capital base in order to support the N1.0tn economy projected for 2026. The minimum capital requirement for commercial banks with international and national licenses was set at N500.0mn and N200.0mn, respectively. Meanwhile, the minimum capital requirement for both commercial banks with regional licenses and merchant banks was set at N50.bn. This means that FBNH has to wear two caps in the recapitalisation exercise, given the Group has a merchant bank, “FBN Merchant Bank”, and a commercial bank with an international license. Options provided by the CBN for the reccapitalisation exercise include Private placements, Right Issues/Offer for subscription, Mergers and Acquisitions (M&As), and upgrade/downgrade of license authorisation.

That said, we believe First Bank Nigeria Holdings Plc is well positioned (as seen in its H1-2024 results) to sustain the performance trend in its financial and non-financial metrics.