Reacting to the recent sanction by the Central Bank of Nigeria (CBN) on the FBN Board changes which has continued to generate reactions in the code of governance, Chapel Hill Denham said it has raised its risk rate on FBN Holdings, noting that merger and acquisition (M&A) is actually possible in the near term due to the dirty board room game that backfired on disengaged Board members.
Analysts at Chapel Hill Denham opened up that M&A is possible given the weaknesses in the capital adequacy ratio and non-performing loan ratios, in breach of acceptable prudential standards of the CBN, in the next 12-18 months.
Brief Background to the issue
Following the removal of Dr. Adesola Adeduntan by the Board without due process, the CBN then dissolved the boards of FBNH and First Bank of Nigeria Limited (FBN).
Recall that in a press briefing, Godwin Emefiele, the CBN governor announced the dissolution of the boards of FBNH and FBN and the reinstatement of the CEO of FBN, Dr. Adesola Adeduntan.
The apex bank also announced the appointment of the new Chairmen of the boards of FBNH and FBN – Mr. Remi Babalola and Mr. Tunde Hassan-Odukale, respectively.
The CBN considers itself as a key stakeholder in management changes at FBN due to the forbearances and close monitoring by the bank over the last 5 years, which is aimed at taming the slide in the going concern status of FBN.
Notably, the removal of Dr. Adeduntan, whose tenor expires in December 2021, by the board of FBN was without CBN’s approval as key disclosures by the CBN point to credit and corporate governance concerns.
The CBN’s target examination as of December 2020 revealed that insider loans were materially non-compliant with the terms of restructuring put in place by the bank and CBN in 2016.
The issue unveiled the management’s non-perfection of lien on shares and collateral arrangements that the CBN had insisted on for over three years are key examples.
It was noted that FBN has also not divested from non-permissible holdings in non-financial entities in line with regulatory directives.
FBN invested in Airtel Nigeria Limited and Honeywell Flour Mills (5% holding) and Honeywell Flour Mills were given a 48-hour ultimatum, effective 26 April, to repay its obligations to FBN.
Is it likely that we see M&A activity in the bank in the next 12-18 months?
Chapel Hill Denham stated,
“We think this is possible given the weaknesses in the capital adequacy ratio (CAR) and non-performing loan (NPL) ratios, in breach of acceptable prudential standards of the CBN.
“We highlight that, in the history of the banking sector, there have been issues relating to credit and corporate governance that eventually resulted in mergers and acquisitions for a stronger financial system”.
The investment firm said FBNH’s Q1-21 results are materially behind its expectations for the financial year 2021. Gross earnings declined by 14.5% year on year in Q1-21 in contrast to the 2021 forecast growth of 19.0%.
Notably, analysts said the 25.3% year on year fall in interest income resulted in a 12.4% year on year decline in net interest income, despite the 25.3% drop in interest expense.
Accordingly, annualised EPS dropped by 32.5% year on year against Chapel Hill Denham financial year 2021 forecasted growth of 0.8%.
It was noted that the lender’s impairment charges rose by 35.7% year on year to N13.17 billion in Q1-21 with the NPL ratio falling to 7.9% (9.2% in Q1-20 and below 2021 forecast of 8.5%), albeit breaching CBN’s prudential standard of 5%.
Analysts at Chapel Hill Denham downgrade the rating on FBNH Plc. to a HOLD for lack of upside potential from a Buy recommendation and the 12-month target price dropped to N6.96 from N9.95.
Explaining the rating action, Chapel Hill Denham said the downgrade is partly reflective of the weak Q1-21 results and the upward adjustment of its risk-free rate to 12.0% from 10.5% previously.
The investment firm said FBNH is currently trading on 2021 return on average equity and price to book ratio of 8.7% and 0.3x against the sector average of 7.5% and 0.6x respectively.