FBN Holding Plc, The Elephant’s Resurgence

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FBN Holdings Plc in its recently released full-year results, reported a 2% decline in gross earnings from N590.29bn in FY 2019 to N578.95bn in FY 2020. On the back of a low-yield environment, interest income declined by 11% YoY from N431.93bn in FY 2019 to N384.79bn in FY 2020.

Non-interest income, however, grew by 23% YoY from N158.37bn in FY 2019 to N194.15bn in FY 2020 – driven by net gains on investment securities (+175% YoY from N17.49bn to N48.08bn), and fee and commission income (+10% YoY from N103.38bn to N113.32bn). Driven by a solid non-interest income growth, operating income grew by 3% YoY from N366.38bn in FY 2019 to N375.72bn in FY 2020.

The Group’s cost-to-income ratio lowered by 100 basis points from 79% in FY 2019 to 78% in FY 2020. As a result, profit before tax grew by 11% YoY from N75.29bn in FY 2019 to N83.70bn in FY 2020 while profit after tax grew by 14% YoY from N66.04bn in FY 2019 to N75.59bn in FY 2020.

The Group declared a N0.45 dividend for FY 2020 (FY 2019: N0.38). The dividend qualification date is on April 20, 2021, while the dividend payment date is on April 28, 2021.

Cheap Funding Booked Amid Financial System Liquidity Glut

The 2020 financial year was characterised by excess liquidity in the financial system, as various Central Banks across the globe implemented accommodative monetary policies to cushion the negative impact of the coronavirus pandemic.

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We note that prior to the pandemic, the Nigerian monetary policy had implemented policies aimed at driving private sector credit growth, in the form of regulatory Loan-to-Deposit (LDR) threshold, and the unwinding of the CBN OMO liabilities.

The Central Bank of Nigeria (CBN), in 2019, placed a ban on corporates and local investorsfrom participating in the OMO auctions. The combination of the earlier laid-out policies to drive credit growth, and the extraordinary dovish monetary policy stance of the CBN during the pandemic resulted in cheaper funds booked by the Group in FY 2020. Customer deposit grew by 22% YoY from N4.02trn in FY 2019 to N4.89trn in FY 2020, largely driven by current and savings (CASA) deposits.

Current deposits rose by 44% YoY from N1.05trn in FY 2019 to N1.51trn in FY 2020, while savings deposits grew by 36% YoY from N1.32trn in FY 2019 to N1.79trn in FY 2020.

As a result, the Group’s CASA rose from 59% in FY 2019 to 67% in FY 2020. The resulting implication was in the form of lower interest expense for the Group.

Regulatory Challenges and Low-Yield Environment Limit Gains of Funding Boost

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On the back of increased funding (i.e., deposits), the Group grew its loan book and investment securities by 20% YoY and 10% YoY, respectively. The 20% YoY growth in loan book is attributed to a 51% YoY increase in term loans (from N998.68bn to N1.51trn). The Group also booked higher short-term loans (overdrafts) from N209.95bn in FY 2019 to N323.79bn in FY 2020.

Loans and advances to banks also grew by 35% YoY from N754.91bn in FY 2019 to N1.02trn in FY 2020, as the Group increased placements with banks, in hunt for higher yields in a lowinterest-rate environment.

Investment securities grew by 10% YoY from N1.41trn in FY 2019 to N1.55trn in FY 2020, due to a 25% YoY increase in held-to-maturity securities. During the financial year, the Group’s mandatory reserves deposits with the CBN (i.e., CRR) rose by 57% YoY from N843.44bn in FY 2019 to N1.32trn in FY 2020, which effectively implies that a total value of N479.01bn was sterilised by the CBN as of FY 2020 due to the Group’s inability to meet the regulatory LDR threshold.

As a result, the liquidity position of the Group was impacted, and we believe that the Group could not take full benefits of the increased cheap funding it booked during the year.

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By implication, the Group’s NIM was affected. In our view, we posit that the inability of the Group to attain the 65% regulatory LDR threshold was due to challenging macroeconomic fundamentals, especially given the impact of the coronavirus on businesses.

High Sensitivity to Interest Rate Push Interest Earnings Southwards

Interest income declined by 11% YoY from N431.93bn in FY 2019 to N384.79bn in FY 2020. Specifically, interest income on investment securities dipped by 27% YoY from N163.14bn in FY 2019 to N118.85bn in FY 2020. We attribute the decline to lower yields in the fixed income market resulting from the accommodative stance of the CBN. Interest income on loans and advances also declined, by 2% YoY from N245.59bn in FY 2019 to N241.03bn in FY 2020.

Overall, the source of interest income decline was from the lower interest earnings on investment securities. In a similar trend, interest expense declined by 13% YoY from N152.34bn in FY 2019 to N133.18bn in FY 2020. As stated above, the liquidity glut in the financial system benefitted the Group in the form of cheap funding.

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Despite a 22% YoY increase in customer deposits during the financial year, interest expense on customer deposit declined by 19% YoY from N111.22bn in FY 2019 to N90.61bn in FY 2020. Hence, the Group’s cost of funds lowered from 3.10% in FY 2019 to 2.30% in FY 2020.

However, on the back of steeper decline in asset yield, the Group’s net interest margin declined from 7.40% in FY 2019 to 6.10% in FY 2020. In absolute terms, net interest income declined by 10% YoY from N279.59bn in FY 2019 to N251.62bn in FY 2020.

Treasury Activities Lift Earnings

The fixed income market was volatile in FY 2020, and there was a bullish run amid lower yields in the financial markets. The Group took advantage of the bullish run and reported a 175% YoY increase in net gains on investment securities from N17.49bn in FY 2019 to N48.08bn in FY 2020.

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Also, net gains from financial instruments rose by 16% YoY from N20.56bn in FY 2019 to N23.77bn in FY 2020. Meanwhile, foreign exchange income dipped from a gain of N9.54bn in FY 2019 to a loss of N1.46bn in FY 2020.

Overall, trading gains accounted for 72% of total non-interest income in FY 2020.

 Increasing Digital Solutions Drive Value

The Group’s digital customers grew by 26% from 13mn as of FY 2019 to 16mn as of FY 2020. Also, the Group recorded a 23% increase in First mobile users to 4.2mn in FY 2020, with over N3.70trn transaction value conducted on the Group’s USSD platform in 2020.

Some of the efforts implemented by the Group to enhance its digital offering to meet customers’ needs included enhancement of the Firstmonie wallet with additional services, introduction of ‘large sum bulk withdrawal’ feature on ATMs, and deployment of digital banking apps in its African subsidiaries.

Fee and commission income grew by 10% YoY from N103.38bn in FY 2019 to N113.22bn in FY 2020. Specifically, credit-related fees rose by 96% YoY from N4.89bn to N9.60bn, reflecting increased loan book growth in FY 2020. Letters of credit commissions and fees grew by 86% YoY from N6.38bn in FY 2019 to N11.89bn in FY 2020. Electronic banking fees, despite a c.50% decline in fees, grew by 1% YoY from N48.03bn in FY 2019 to N48.68bn in FY 2020.

The solid growth in fee and commission income and trading gains drove the Group’s 23% YoY non-interest income growth from N158.37bn in FY 2019 to N194.15bn in FY 2020, thus accounting for 48% of operating income in FY 2020 (FY 2019 contribution: 36%).

Weakened by the decline in net interest income, operating income grew by just 3% YoY from N366.38bn in FY 2019 to N375.72bn in FY 2020. Profit before tax grew by 11% YoY from N75.29bn in FY 2019 to N83.70bn in FY 2020, supported by an improvement in the Group’s cost-to-income ratio from 79% in FY 2019 to 78% in FY 2020. Profit after tax rose by 14% YoY from N66.04bn in FY 2019 to N75.59bn in FY 2020.

The Homecoming Of The Elephant

The Group recorded improvements across its major performance metrics in FY 2020. We note that the Group faced a tumultuous period in the past few years, resulting from the 2016 economic recession. For instance, the Group’s asset quality materially improved, as the nonperforming loan (NPL) ratio lowered from 24.40% as of FY 2016 to 7.70% as of FY 2020.

The Group also made a considerable progress in its efforts to maintain an adequate capital position. During the financial year, the Group injected the proceeds of the sale of its insurance subsidiary to capitalise its banking subsidiary. As a result, the banking subsidiary’s capital adequacy ratio improved from 15.50% as of FY 2019 to 17.00% as of FY 2020 (regulatory threshold: 15%). The Group intends to increasingly drive capital accretion to support its business in the current operating environment.

Business Outlook

While the macroeconomic challenges are noted, notably the volatilities in the foreign exchange market and weak household consumption, we expect to see a rebound in the Group’s interest income due to the rising yields in the fixed income market.

The higher interest-rate environment also effectively implies a higher interest expense; however, we believe that the low-cost funding profile of the Group positions it to expand net interest margin in the near term.

We also expect the Group to deepen its digital footprints in the near to medium term, and we expect to see continued value accretion from the digital banking space. Using a blend of Discounted Dividend Model (DDM) and Residual Income Model (RIM), we estimate a N7.51 fair value for the Group.

Our fair value estimate effectively implies a 3.09x justified price-to-earnings (P/E) multiple. At the stock’s N7.65 current market price, the stock trades at a 3.15x forward P/E, thus translating to a -2% price return. We forecast a N0.51 dividend for FY 2020, which implies a 6% dividend yield. Therefore, we estimate a 4% total return for the stock. We recommend a HOLD.

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