We lower our valuation of FBNH Plc on the back of a significant decline as reported in its Q1 2021 earnings results. FBNH’s gross earnings declined by 14% YoY to N136.58bn in Q1 2021 from N159.68bn in Q1 2020.
Interest income declined by 25% to N78.36bn in Q1 2021 from N104.91bn in Q1 2020. However, on a positive note, non-interest income grew by 6% YoY to N58.22bn in Q1 2021
from N54.78bn in Q1 2020.
Resulting from the material decline in net interest income, the Group’s operating income declined by 8% YoY to N92.24bn in Q1 2021 from N100.29bn in Q1 2020. the cost-to-income ratio worsened by 900 basis points to 80%, from 71% in Q1 2020. Therefore, profit before tax dipped by 34% YoY to N18.91bn in Q1 2021 from N28.68bn in Q1 2020.
Net income also declined by 32% YoY to N15.62bn in Q1 2021 from N23.14bn in Q1 2020.
Sustained Impact of Low-Yield Environment Depress Interest Income
Interest income on investment securities declined by 62% YoY to N14.68bn in Q1 2021 from N38.45bn in Q1 2020.
We attribute the decline to repricing of investment securities purchased in 2020 when
interest rates were significantly lower. Interest income on loans and advances to customers also declined by 6% YoY to N59.85bn in Q1 2021 from N63.95bn in Q1 2020, despite a 16% YoY growth in loan book to an average of N2.26trn in Q1 2021 from an average of N1.95trn in Q1 2020.
Meanwhile, interest income on loans and advances to banks grew by 53% YoY to N3.82bn in Q1 2021 from N2.49bn in Q1 2020.
The decline in interest income on investment securities accounted for c.90% of the overall interest income decline during the period.
Higher Impairment Losses Erode Cost Savings from Interest Expense
Interest expense declined by 43% YoY to N25.56bn in Q1 2021 from N35.15bn in Q1 2020, although interest-bearing liabilities grew by 18% YoY to an average of N6.39trn in Q1 2021 from an average of N5.44bn in Q1 2020. Specifically, deposits from customers grew by 20% YoY to an average of N4.99trn in Q1 2021 from an average of N4.15trn in Q1 2020. We link the higher deposits generated during the period to the sustained impact of increased liquidity in the financial system, due to the continued accommodative policy stance of the monetary policy authorities.
The steeper decline in interest expense moderated the decline in net interest income to 12% YoY to N52.79bn in Q1 2021 from N75.75bn in Q1 2020. However, a 36% YoY spike in impairment charge for credit losses to N13.18bn in Q1 2021 from N9.71bn in Q1 2020, eroded the cost savings and thus resulted in a 22% YoY decline in net interest income after impairment losses.
Increased Digital Banking Activities Lift Non-Interest Earnings
Non-interest income grew by 6% YoY to N58.22bn in Q1 2021 from N54.77bn in Q1 2020, driven by fee and commission income (+32% YoY to N34.03bn from N25.81bn), and net gains on investment securities (+32% YoY to N17.86bn in Q1 2021 from N13.50bn). Meanwhile, the Group recorded a decline in dividend income (-99% YoY to N26mn from N4.02bn), and net gains from financial assets held for trading purposes (-63% YoY to N3.12bn from N8.34bn).
The significant increase in fee and commission income and net gains on investment securities totally offset the decline recorded on other non-interest income components.
Bottomline Deteriorates on the Back of a Higher Cost-to-Income Ratio
Profit before tax declined by 34% YoY, induced by a 2% YoY increase in operating expense to N73.33bn in Q1 2021 from N71.61bn in Q1 2020, whereas operating income declined by 8% YoY.
Therefore, the double-whammy of an operating income decline and an increase in operating expense translated to a lower bottom line.
Outlook
In our previous report, we forecasted the N2.43 earnings per share (EPS) forecast for FY 2021. We expected the repricing of assets to take effect much sooner. We still expect to see a repricing of risk assets in the subsequent quarters, amid an upward trend in yields in the economy.
Owing to the impact of Q1 2021 earnings, our revised FY 2021 EPS estimate now stands at N1.87, with an expected dividend of N0.40.p
Using a blend of Discounted Dividend Model (DDM) and Residual Income Model (RIM) valuation methodologies, we arrived at a revised value of N6.57 per share. At the current market price, the stock offers a -2% total return (price return: -8%; dividend yield: 6%).
Thus, we believe that the stock is fairly valued and recommend a HOLD.
