FBN Holdings Plc: Impact of COVID-19 limits upside potentials

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FBN Holdings Plc (‘FBNH’ or ‘The Group’) reported an 8% year-on-year (YoY) net profit decline in Q2’20, driven by a significant increase in impairment charges. Interest income declined by 4% YoY from N107.23bn in Q2’19 to N102.51bn in Q2’20. Interest expense also declined, at a faster pace of 15% from N37.19bn in Q2’19 to N31.49bn in Q2’20. The decline in both interest income and interest expense was on the back of a low-yield environment. Consequent to the higher decline in interest expense relative to interest income, net interest income grew marginally by 1% YoY from N70.03bn in Q2’19 to N71.02bn in Q2’20.

However, the Group incurred a 154% YoY rise in an impairment charge for credit losses, from
N8.26bn in Q2’19 to N20.95bn in Q2’20. The relatively higher impairment charge, in our view, reflected provisioning of the Group’s loan book exposure to sectors vulnerable to the COVID-19 pandemic. Therefore, owing to the increase in an impairment charge for credit losses, net interest margin after impairment declined by 19% YoY from N61.77bn in Q2’19 to N50.08bn in Q2’20.

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Non-interest income grew by 7% YoY from N28.25bn in Q2’19 to N30.36bn in Q2’20. The
growth in non-interest income was spurred by a 494% YoY rise in net gains on sale of
investment securities from N2.16bn in Q2’19 to N12.82bn in Q2’20. Although the Group
incurred losses on foreign exchange (-439% from a gain of N1.84bn to a loss of N6.22bn), and losses from financial instruments held at fair value through profit or loss (-143% from a gain of N2.39bn in Q2’19 to a loss of N1.03bn in Q2’20); the significant rise in gain on sale of investment securities totally offset the losses in other non-interest income line. Notably, the Group took advantage of the volatility in the financial markets in Q2’20. On the other hand, net fee and commission income grew by 25% YoY from N20.71bn in Q2’19 to N25.98bn in Q2’20.

Despite the reduction of fees by almost 50% by the Central Bank of Nigeria, the growth in net fee income was supported by higher transaction volumes recorded across the Group’s digital banking platforms.

Despite the growth in non-interest income, operating income dipped by 11% YoY from
N90.03bn in Q2’19 to N80.44bn in Q2’20. The primary driver was the high impairment charge recorded during the quarter. The Group’s cost optimisation efforts resulted in a 6% YoY decline in operating expenses from N71.56bn in Q2’19 to N67.57bn in Q2’20. However, as expected, the 11% decline in operating income (inclusive of impairment losses) was more pronounced than the 6% decline in operating expenses. Therefore, the Group’s cost-to-income ratio rose from 79% in Q2’19 to 84% in Q2’20. By extension, profit before tax declined by 31% YoY, from N18.48bn in Q2’19 to N12.74bn in Q2’20. Owing to a lower effective tax rate in Q2’20 (2% vs 27% in Q2’19), the bottom line decline moderated, as profit after tax declined by 8% YoY from N14.26bn in Q2’19 to N12.50bn in Q2’20.

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Summary of Financial Performance

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FBN Holdings Plc

Other Developments During the Quarter

The Group successfully divested its 65% equity stake in FBN Insurance Ltd (its insurance
subsidiary) to Sanlam of South Africa. The total value of the transaction was undisclosed, but the Group announced recently of injecting a N25bn capital into its banking subsidiary, in which raised the capital adequacy ratio of the bank to 16.50% as of H1’20 (from 15.30% as of Q1’20). The management notified that the N25bn injected capital was part of the net proceeds of the sale of its equity stake in FBN Insurance.

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The Group’s non-performing loan (NPL) ratio moderated to 8.80% as of H1’20, from 9.90% as of FY’19

Outlook and Valuation

Although the Group reported a significant increase in net gains from sales of investment
securities, other trading gains line items declined, which reflected our postulation about how sustainable earnings from trading activities was. On a quarter-on-quarter basis, trading gains declined from N24.95bn in Q1’20 to N6.37bn in Q2’20. The Group’s core business operations – banking remained under pressure during the quarter, notably due to the lower yield environment. The impact of pandemic-induced lockdown on loan book is also a major downside risk to the Group.

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While we expect the low-yield environment to be sustained during the subsequent quarters of the year, despite our view that the low-interest environment is not fundamentally driven, we believe that there will be a moderation in the impairment losses recorded in H2’20. Overall, we leave our FY’19 EPS forecast unchanged at N2.32. We also expect the Group to declare a dividend of N0.42, which implies an 8% dividend yield as at the most recent closing price. We arrived at a justified P/E multiple of 3.42x for the stock (previous: 1.90x), reflecting the improved risk environment relative to what was obtainable as at the time of our Q1’20 report. As a result, we estimate a fair value of N7.93 for the stock. At the most recent closing price of N5.00, the total return (price return and dividend yield) of the stock stands at 67%. Hence, we recommend a BUY

Financial Projections

FBN Holdings Plc

BRAND SPUR

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