FBN Holdings PLC FY’19 (Unaudited) Earnings – Bank Records 4% y/y Growth in Gross Earnings, PAT

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FBN Holdings PLC FY'19 (Unaudited) Earnings - Bank Records 4% y/y Growth in Gross Earnings, PATFBN Holdings PLC FY'19 (Unaudited) Earnings - Bank Records 4% y/y Growth in Gross Earnings, PAT
  • Provisions moderate 52% y/y
  • cost-to-income ratio remains above 70%
  • 20% y/y jump in Opex drags profits

High Opex erodes mild earnings gains

FBNH released its Unaudited FY’19 results, reporting most y/y improvements across key line items. Interest Income came in 4% higher y/y at ₦614.5 billion (Vetiva estimate: ₦593.0 billion), largely the result of a 16% increase in income from investment securities. Meanwhile, Interest Expense grew by just 3% y/y to ₦154.3 billion, in line with our estimate, the result of a 51% y/y drop in interest paid on borrowings. Overall, Net Interest Income came in flat y/y at ₦286.4 billion (Vetiva estimate: ₦281.5 billion). Furthermore, the bank also reported a 12% y/y increase in Non- Interest Income, mainly driven by a
234% y/y gain in trading income. Moreover, the bank posted a 52% y/y decline in provisions on loans to ₦41.7 billion (Vetiva estimate: ₦36.9 billion), a positive sign for the bank’s risk management going forward (FY’19: 2.1% vs FY’18:4.2%). However, the bank posted a 20% y/y jump in Opex to ₦345.1 billion (Vetiva Estimate: ₦317.9 billion); this was driven by a 13% increase in Operational losses to ₦24.1 billion. Ultimately, the bank still recorded a 13% y/y increase in PBT to ₦ 73.5 billion and PAT of ₦62.1 billion (Vetiva Estimate: ₦70.9 billion), translating to an ROAE of 10.1%. While we are encouraged by the bank’s continued efforts to reduce loan loss provisions by writing off legacy bad debts, the bank’s Cost-to-income ratio remains a concern.

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Profits halve in the fourth quarter

While the bank reported a strong fourth quarter for Gross earnings (+17% q/q to ₦171 billion) and Net Interest Income (+16% q/q to ₦74.9 billion), a 109% q/q jump in provisions to ₦13.25 billion and 35% q/q rise in Opex, led to a 33% drop in PBT to ₦13.5 billion and a 49% fall in PAT to ₦10.3 billion. Although we do not expect the bank to record such high losses going forward, we expect FBNH’s cost-to-income ratio to remain above 70% in the near-term (Tier-1 average: 56.5%).

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TP revised to ₦12.00 (Previous: ₦13.96)

Although we note FBNH’s gradual improvement in profitability throughout the year, we reiterate that the bank’s profitability remains well below that of its peers. Therefore, our estimates have been revised marginally to reflect the deviation in Profits. We foresee a 6.5% y/y growth in Gross Earnings to ₦654.7 billion (FY’19: ₦614.5 billion), mainly driven by an expected 10% y/y increase in Non-Interest Income. In 2020, we foresee only a mild improvement in Net Interest Income due to the low-yield environment and less aggressive loan-book expansion. Therefore, we expect Net Interest Income to improve by 1% to ₦290.2 billion, in line with FY’19 growth. Also, we have conservatively forecasted a 5% y/y increase in Opex to ₦363.4 billion, with the expectation that the majority of the one-off charges and losses had been taken in FY’19. Finally, we expect loan loss provisions to moderate further to ₦28.1 billion (FY’19: ₦41.7 billion), reflecting the improvement in asset quality. Therefore, we forecast FY’20 PAT of ₦76.0 billion (FY’19: ₦62.1 billion), giving the bank an expected ROAE of 11.6%. Overall, we revise our Target Price (TP) to ₦12.00 (Previous: ₦13.96), a 103% premium from its current price. Thus, we place a BUY rating on the stock. However, we note that this rating is subject to change upon release of the bank’s audited financial statements.

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