Heading for a single-digit NPL ratio: FBNH 9M 2019 earnings

FBN-Holdings-Plc brand spur

Earlier, FBN Holding Plc (“FBNH” or “The Bank”) released its 9M-19 results, showing a –0.4%y/y decline in Gross Earnings (GE) to N439.9bn. The Bank’s flattish topline can be attributed to sustained pressure on interest income which fell 3.0%y/y to N327.5bn amid hesitant loan growth and poor yields on interest-bearing assets. PBT and PAT, however, continued to rebound, up 16.9%y/y and 15.3%y/y to N60.0bn and N51.8bn respectively. We review the 9M earnings and adjust our expectations for FY-19 below.

Powering back to profitability: FBNH’s gross earning was flattish, reflecting the impact of the hesitant position of the bank to expand its loan book (up 1.5% YTD) amid weaker earnings yield. Notably, while the deployment of funds to investment securities decreased 9.7%, interest income on investment securities surged 12.2% to N1342.6bn. On the contrary, interest income on loans fell 8.9%y/y to N184.6bn. Although Interest expense remained unchanged at N116.0bn, Net Interest Income fell 4.6%y/y to N211.4bn on the back of weaker interest income. Thus, NIM settled at 7.3%. Additionally, Non-Interest Income reported modest growth, rising 6.0% to N98.6bn on the back of sustained uptrend in electronic banking fee, but not strong enough to buoy gross earnings of the bank. Notably, loan loss expense continues to fall sharply, down 62.6% to N28.5bn (vs N76.2bn in the prior year) as the bank complete its efforts to restructure its balance sheet. As at H1-19, management highlighted that the Atlantic energy loan which accounts for the largest portion of the NPL is fully written-off. Nonetheless, Cost-to-Income ratio jumped to 71.5% as OPEX surged 18.4% (vs. weak income growth). Overall, the improvement in loan loss expense buoyed bottom line numbers as PBT and PAT rose 16.9% and 15.3% y/y to N60.0bn and N51.8bn respectively. As such, net margin and ROE improved to 11.8% and 18.3% (vs. 10.2% and 14.8%) respectively.

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Asset Quality improves on Atlantic Energy NPL Write-Off: Compared to 25.9% Dec-2018, NPL ratio fell sharply to 14.5% in H1-19 as the bank reported that it has completed the write-off of the Atlantic Energy loan. As of 9M-2019, NPL ratio is on course to hit the Bank’s single-digit NPL target at 12.6%. Nevertheless, Loan to Deposit ratio came below the CBN’s minimum threshold for both FBN Ltd and FBN Merchant Bank, both of whom were penalized by the CBN – to the tune of N77.4bn– for failure to meet the 60.0% target. We imagine that effort to boost LDR towards the new minimum threshold of 65% will drive up loan book marginally by year-end.

BUY rating retained as asset quality improves: Although Revenue growth remains unaspiring, our outlook for FBNH going forward is more positive following the full write-off of the Atlantic Energy Loan. We expect this to boost the bottom-line significantly by a full year. Also, improvement in profitability margins is projected to drive up ROE to about 20% by a full year, thus, increasing the earnings and dividend yield outlook for the bank. We estimate the dividend yield for FY-2019 at 4.9%. Yet, we note that management must check rising OPEX which continues to pressure cost to income ratio above peer average. Given the foregoing, views on FBNH is broadly positive. At its current price of N5.3/share, the bank seems to be trading at a discount to peers. This is as its PB & PE ratios settled 0.3x and 3.3x compared to peer (tier 1) average 0.6x and 2.8x respectively. As such, we retain our BUY rating on FBNH.

Heading for a single-digit NPL ratio: FBNH 9M 2019 earnings - Brand Spur
Sources: Company Financials, United Capital Research

United Capital Research