FBN Holdings Plc’s positive earnings performance in H1 2020 was amid gain on sale of investment securities and increased net fee and commission income. Given the low yield environment, it appears First Bank Plc now leans on investment securities trading, as against holding securities to maturity, and commission on transactions to boost profitability.
Hence, net fees and commission grew year-on-year (y-o-y) by 16.41% to N46.75 billion even as net gains on the sale of investment securities spiked y-o-y by 601.33% to N26.32 billion in H1 2020. Given the growth witnessed in non-interest income lines, the Tier-1 bank’s gross earnings rose marginally by 2.60% to N296.55 billion in H1 2020, from N280.24 billion in H1 2019.
However, income from the core business suffered a marginal setback as interest income fell y-o-y by 4.31% to N207.42 billion in H1 2020. Also, interest expense rose by 1.44% to N76.14 billion, from N75.06 billion in H1 2019, driving the cost of funds higher despite the ridiculously low yield environment – although the underlying deposit base increased by 8.79% to N4.37 trillion.
Thus, net interest income moderated y-o-y by 7.35% to N131.28 billion in the period under review. On the cost side, operating expenses rose slightly to N139.17 billion from N137.94 billion due to higher personnel costs.
Nevertheless, with the good increase in non-interest income (the cost to income ratio fell to 65.8% from 70.3%) and under-tax provision (it fell to N5.77 trillion, from N7.46 trillion despite the recorded rise in Profit Before Tax), potential distributable profit to shareholders spiked y-o-y by 60.33% to N48.49 billion in H1 2020.
Hence, we expect investors to speculate on FBNH shares amid anticipation of higher dividend payout; although our current performance rating is a “D”.
… Injection of New Capital amid Sale of Subsidiary Boosts CAR
FBNH, having successfully completed the sale of its 65% shareholdings in FBN Insurance Limited to Sanlam Emerging Markets Limited at N24.63 billion (booking N10.52 billion as profit), boosted capital adequacy ratio by injecting N25 billion in fresh Tier-1 capital. Its total equity value increased to N704.09 billion as at H1 2020 (boosting CAR to 16.5% from 15.5% as at FY 2019) from N661.13 billion as at FY 2019. Notably, on an eight-year average, Return on Equity stood at 10.6%.
… Electronic Banking a Strong Contributor to Non-Interest Income
First Bank Nigeria Holdings Plc recorded a sizable revenue from its online platforms despite the COVID-19 pandemic; albeit, revenue from electronic banking channels declined marginally by 0.50% y-o-y to N21.72 billion (or 38.93% of the non-interest income) in H1 2020 from N21.83 billion (or 44.49%) in H1 2019 due to reduction in regulated fees by CBN. On a positive note, mobile banking scheme transaction value rose to N4.54 billion from N2.99 billion having recently launched an improved version of the Firstmobile App with more innovative features.
… Focuses on Short Tenured Loans given Low-Interest Rate Regime
Given the low-interest rate regime (interest rates trended southwards), FBNH has kept its focus on short-tenured loans in order to mitigate against the sudden upsurge in interest rate. Hence, loans and advances falling due within 0 to 12 months grew to 50.4% of total loans in H1 2020, from 47.6% in FY 2019.
Meanwhile, First Bank restructured 15.0% of its gross loans in Q2 2020 (from 6% in Q1 2020) amid CBN’s approved regulatory forbearance for the restructuring of customers’ loans impacted by the outbreak of COVID-19. The tier-1 bank’s loan exposure to the Oil & Gas (Upstream) sector stood at 17.2% in H1 2020 (lower than 17.9% in FY 2019); while its loan exposure to Manufacturing sector rose to 19.8% (up from 16.5%).
Despite their relatively high exposure, NPLs for the two sectors remained low: Oil & Gas Upstream sector NPL stood at 6% and Manufacturing sector NPL at 4%.
… Underutilization of Assets Still Poses Threat to Earnings
FBNH’s profitability in H1 2020 was largely propelled by the sale of investment securities which could have been supported by higher interest income given its large assets base – total assets significantly increased to N7.13 trillion in H1 2020 from N5.67 trillion printed in H1 2019.
Instead, we saw much of FBNH’s assets sterilized in CBN’s vault as “mandatory reserve deposits with Central Bank”. This amount grew by 94.49% y-o-y to N1.64 trillion in H1 2020 from N843.44 billion in H1 2019. The significant increase was due to the compulsory movement of the half of the shortfall of its loans to deposits ratio (which was 49.53% as at H1 2020 as against the set regulatory requirement of 65%) by CBN as Cash Reserves.
We note that the asset could have been strategically deployed to generate better returns for the shareholders of the company. Further breakdown of the total assets showed that risk assets constituted 38.66% (N2.76 trillion) as at H1 2020 as against 47.64% (N2.70 trillion) as at H1 2019.
Despite the rise in risk assets, Non-Performing Loans (NPLs) came in lower at 8.80% (from 14.5% in H1 2019), trending towards the regulatory requirement of 5%. The tier-1 bank played big at the inter-bank window to take advantage of the relatively high rate in that space – due from other banks stood at N1.19 trillion, up from N701.90 billion as at H1 2019.
Notably, we saw investment securities drop y-o-y by 12.09% to N1.19 trillion (from N1.36 trillion) given the partial sale of its treasury bills and bonds securities at a profit. We feel that FBNH is gradually bouncing back on its feet amid reduced NPLs and improved profitability; however, we expect the bank to further increase lending to the real sector of the economy in order to boost profit and meet up with the LDR as stipulated by CBN going forward.
Given its not-so-impressive performance in the past years and the several cuts in dividend payouts, FBNH earned ‘D’ on our historical long-term average performance rating template.