FBN Holdings Plc recently released its interim financial results for the first quarter ended March 31, 2020. During the period, the Group recorded a 15% growth in gross earnings from N139.44bn in Q1’19 to N159.68bn in Q1’20. Operating income grew by 19% year-on-year, from N84.14bn in Q1’19 to N100.29bn in Q1’20. Operating expenses also increased, albeit at a slower rate, by 8% year-on-year, from N66.38bn in Q1’19 to N71.61bn in Q1’20. The slower growth in operating expense relative to operating income implied an improvement in the Group’s cost-to-income ratio, from 79% in Q1’19 to 71% in Q1’20. Consequently, profit before tax rose by 61% year-on-year, from N17.76bn in Q1’19 to N28.68bn in Q1’20. In a similar trend, profit after tax grew by 59% year-on-year, from N14.52bn in Q1’19 to N23.14bn in Q1’20.
Lower Risk-Asset Yield Caps Interest Income Growth
Interest income declined by 4% year-on-year, from N109.53bn in Q1’19 to N104.91bn in Q1’20. The decline in interest income was driven by an 11% year-on-year decline in interest income on investment securities, from N43.21bn in Q1’19 to N38.45bn. As of Q1’20, the average total value of investment securities of the Group stood at N1.29trn, relative to an average of N1.57trn in Q1’19 (i.e. 18% decline). Therefore, the decline in interest income in investment securities was mainly due to the lower investment securities in Q1’20. Interest income on investment securities contributes c.38% to total interest income.
Driven by the recent Loan-to-Deposit ratio (LDR) policy of the Central Bank of Nigeria (CBN), the Group’s loan book expanded by 7% from an average of N2.60trn in Q1’19 to N2.77trn in Q1’20. Despite the growth in the Group’s loan book, interest income on loan and advances remained flat at N66.45bn in Q1’20 (Q1’19: N66.32bn). We attribute the unchanged position of interest income to lower yields on loans, amid competition and excess liquidity in the banking system. In Q3’19, the CBN adopted a series of heterodox policies to drive yields down in the system. The CBN implemented its policies by initially mandating banks to maintain an LDR of 60% before September 2019. The LDR was later raised to 65% before December 2019. Further to the LDR ratio policy, the CBN placed a ban on the participation of local asset managers and local corporates in the Open Markets Operations (OMO) market, thus restricting the participation to foreign investors only. The participation ban was the masterstroke that drove yields downwards in the system due to the limited investment opportunities available to local asset managers to place their funds. Therefore, the surge in liquidity, coupled with the LDR policy directive of the CBN, resulted in a price war among banks and other financial institutions in the economy.
Lower Cost of Funds on the Back of Excess System Liquidity
Interest expense grew by 18% year-on-year, from N37.87bn in Q1’19 to N44.65bn in Q1’20. The increase in interest expense majorly resulted from interest expense on banks deposits which grew by 149% year-on-year, from N7.18bn in Q1’19 to N17.90bn in Q1’20. The spike in interest expense on banks deposits was, however, consistent with the 40% growth in deposits from banks, from an average of N731.06bn in Q1’19 to an average of N1.02trn in Q1’20. Furthermore, the cost of fund for deposits from banks rose to 6.99% in Q1’20 from 3.93% in Q1’19.
On the other hand, interest expense on customer deposits declined by 3% year-on-year, from N27.38bn in Q1’19 to N26.64bn in Q1’20. Although deposits from customers grew by 19% from an average of N3.50trn in Q1’19 to N4.15trn in Q1’20, cost of funds for customer deposit declined to 2.57% (Q1’19: 3.13%). As mentioned above, we attribute the lower cost of funds for customer deposits to the excess liquidity in the system. Resulting from limited investment opportunities faced by local asset managers and excess supply of capital, the Deposit Money Banks (DMBs) successfully repriced deposits from customers. Lower Impairment Charge Partially Offsets Decline in Net Interest Income Overall, the Group’s total cost of funds improved to 3.45% in Q1’20 (Q1’19: 3.58%). However, the lower cost of funds could not make up for the effect of the 4% decline in interest income during the period. Consequently, net interest income declined by 16% year-on-year, from N71.66bn in Q1’19 to N60.25bn in Q1’20.
Meanwhile, impairment charge for credit losses declined by 30% year-on-year, from N13.85bn in Q1’19 to N9.71bn in Q1’20, underscoring the recovery efforts of the Group to improve asset quality. The major bottleneck of the Group over the last few years, which had eroded profitability, has been the impairment charge on credit losses on some of its legacy loans. The oil price collapse in 2016, which resulted in the economic recession in the Nigerian economy, took its toll on the Group’s loan book. Due to the Group’s significant exposure to the Oil and Gas sector, the Group took significant impairments on its delinquent assets. However, the Group’s path to recovery was reflected in the significant decline in an impairment charge in FY’19. The trend continued in Q1’20.
Strong Performance of Non-Interest Income Drives Bottomline Growth
Non-interest income boosted by 89% year-on-year, from N26.33bn in Q1’19 to N49.74bn in
Q1’20. The growth in non-interest income was driven by trading gains during the period.
Trading gains (on investment securities) surged by 748% year-on-year, from N1.59bn in Q1’19 to N13.50bn in Q1’20. The Group also recorded significant increases on other lines. Dividend income grew by 103% year-on-year, from N1.98bn in Q1’19 to N4.02bn in Q1’20. The Group earned a fresh dividend income of N2.51bn from its investment in Airtel. Net fee and commission income grew by 7% from N19.45bn in Q1’19 to N20.77bn in Q1’20.
The strong performance recorded on the non-interest income lines resulted in a 19% year on year increase in operating income, from N84.14bn in Q1’19 to N100.29bn in Q1’20. Notably, non-interest income contributes an average of 40% to operating income.
Cost Efficiency Further Strengthens Bottomline Growth
Operating expenses grew by 8% year-on-year, from N66.38bn in Q1’19 to N71.61bn in Q1’20. Following the lower growth in operating expenses (8%), relative to the growth in operating income (19%), the Group’s cost-to-income ratio declined by 800 basis points from 79% in Q1’19 to 71% in Q1’20.
Consequently, profit before tax grew significantly by 61% year-on-year, from N17.76bn in Q1’19 to N28.68bn in Q1’20. However, owing to a higher effective tax rate of 19% in Q1’20 (Q1’19: 18%), profit after tax grew by 59% year-on-year, from N14.52bn in Q1’19 to N23.14bn in Q1’20.