CardinalStone Research
FBN Holdings Plc (FBNH: TP 7.76 – BUY) has reported a 13.1% YoY increase in EPS to N1.38 for 9M’19 in its latest filing with the Nigerian Stock Exchange (NSE). The growth in earnings can be attributed to lower credit impairment losses (-62.6% YoY) as well as growth in net fee and commission income (+21.5% YoY).
Some positives:
- Gross loans to customers grew by 2.7% in Q3’19 to N1.9 trillion compared to the level in Q2’19. This is possibly a reflection of the CBN’s recent measures aimed at boosting credit to the private sector. Year-to-date, however, FBNH’s gross loans represent a 6.4% contraction from FY’18 level (vs. -8.9% in H1’19)
- Notwithstanding the growth in loans, NPL ratio declined from 14.5% in Q2’19 to 12.6% in Q3’19. This is largely in line with management’s commitment to reduce the NPL ratio to below 10.0% by FY’19. We note that the NPL ratio was 25.6% as at FY’18.
- Credit impairment losses declined further in Q3’19 (-23.1%) to N6.4 billion. This reflects an improvement in the cost of risk to 2.0% in 9M’19 from 2.5% in H1’19. Cost of risk as at FY’18 was 4.2%.
- Non-interest income grew by 5.6% QoQ, supported by higher net fees and commission income (+8.7%) and a 10-fold increase in investment security gains during the quarter.
- Annualised ROE and ROA, at 12.2% and 1.2% respectively, are currently ahead of FY’18 levels of 9.9% and 1.1% respectively.
Some concerns:
- Although operating expenses declined during the quarter (-4.7% QoQ), the cost to income ratio remains elevated (Q3’19: 73.5%; Q2’19: 72.8%) largely reflecting the impact of the weaker net interest income (-10.8% QoQ). Year to date, the observed weakness in cost to income ratio (9M’19: 71.5%; 9M’18: 59.5%) reflects the impact of the bank’s ongoing optimization projects to ensure long-term operational efficiencies. According to management, these costs are one-off and unlikely to recur post-FY’19.
- We also note the decline in CAR to 15.1% as at 9M’19 (regulatory minimum: 15.0%). According to management, the CAR of 15.1% does not capture the impact of capitalization of earnings generated during the year, which could potentially uplift capital adequacy ratio to between 16.4% and 16.8% for the period. However, this is still below the bank’s CAR of 17.3% as at FY’18.
