FBN Holdings Plc reported a solid earnings performance in Q2 2021.
Gross earnings grew by 13% year on-year (YoY) to N154.81bn in Q2 2021, driven by non-interest income. Non-interest income grew by 110% YoY to N72.15bn while interest income declined by 19% YoY to N82.66bn.
Operating income grew by 31% YoY to N105.74bn, while operating expense grew by 17% YoY toN79.24bn. As a result, profit before tax spiked by 107% YoY to N26.33bn.
Profit after tax rose by 80% YoY to N22.45bn.
Solid Non-Interest Income Underpins Diversified Earnings Base
The Group’s digital business recorded a solid growth in Q2 2021, underpinned by a 17% YoY growth in fee and commission income to N35.05bn – largely accounted for by a 35% growth in electronic banking fees.
Also, a marked growth was recorded across other line items in the fee and commission income component including letter of credit fees (+66% YoY to N4.52bn), and account maintenance fees (+59% YoY to N3.88bn).
Fair value gains on financial instruments measured at fair value through profit or loss grew significantly to N19.31bn in Q2 2021, from a fair value loss of N1.03bn in Q2 2020.
The fair value gains recorded were mostly FX-related. Other operating income also grew markedly to N14.58bn in Q2 2021 (Q2 2020: N804mn), majorly resulting from income realized on seized assets.
The combination of the solid growth recorded on fee and commission income, fair value gain on financial instruments, and sundry income (income from seized assets) resulted in a 110% YoY growth in non-interest income to N72.15bn in Q2 2021. By implication, non-interest income accounted for 47% of gross earnings in Q2 2021 (Q2 2020 contribution: 25%).
Rising Yields Yet to Reflect on Interest Income
Interest income declined due to the impact of lower asset yields in Q2 2021, relative to Q2 2020. Interest expense remained flat at N31.63bn. On a positive note, impairment charge for credit losses declined by 46% YoY to N11.34bn. Net-interest income after impairment charge declined by 21% YoY to N39.69bn in Q2 2021.
Driven by non-interest income growth, operating income grew by 31% YoY to N105.74bn in Q2 2021.
Operating expense also grew – albeit at a slower rate of 17% YoY to N79.24bn. The major cost drivers were regulatory costs. Cost-to-income declined to historical average of 75% (H1 2020: 84%).
Hence, profit before tax widened, with a 107% YoY growth to N26.33bn in Q2 2021.
Profit after tax grew by a lower rate of 80% YoY to N22.47bn, due to a higher effective tax rate in Q2 2021.
H1 2021 Performance
Gross earnings declined by 2% YoY to N291.39bn.
✓ Q2 2021 gross earnings grew by 13% YoY to N154.81bn, driven by non-interest income growth.
✓ Q1 2021 gross earnings declined by 14% YoY to N136.58bn, driven by interest income decline.
Interest income declined by 22% YoY to N161.02bn.
✓ Q2 2021 interest income declined by 19% YoY to N82.66bn, due to sustained low asset yields.
✓ Q1 2021 interest income declined by 25% YoY to N78.36bn, due to low asset yields.
Interest expense declined by 25% YoY to N57.19bn.
✓ Q2 2021 interest expense remained flat at N31.63bn, attributed to possible repricing of deposits, as well as improved funding base mix.
✓ Q1 2021 interest expense declined by 43% to N25.56bn, on the back of a low-yield environment. The impairment charge for credit losses declined by 20% YoY to N24.52bn.
✓ Q2 2021 impairment charge declined by 46% YoY to N11.34bn, attributed to improved
macroeconomic fundamentals and economic recovery.
✓ Q1 2021 impairment charge grew by 36% to N13.18bn, due to the spill-over effect of the COVID-19- induced economic downturn.
Non-interest income grew by 46% YoY to N130.37bn.
✓ Q2 2021 non-interest income grew by 110% YoY to N72.15bn, driven by fee and commission income (+17% YoY to N35.05bn), net gains from financial instruments (+1,969% to N19.40bn), and other income (+1,713% to N14.58bn).
✓ Q1 2021 non-interest income grew by 6% YoY to N58.22bn, driven by fee and commission income (+32% YoY to N34.03bn), and net gain on sale of financial instruments (+32% YoY to N17.87bn).
Operating income grew by 10% YoY to N197.97bn.
✓ Q2 2021 operating income grew by 31% YoY to N105.74bn, driven by non-interest income growth.
✓ Q1 2021 operating income declined by 8% YoY to N92.24bn, induced by net-interest income decline.
Operating expense grew by 10% YoY to N152.57bn.
✓ Q2 2021 operating expense grew by 17% YoY to N79.24bn, driven by regulatory costs and deprecation charges.
✓ Q1 2021 operating expense grew by 2% YoY to N73.33bn, driven by personnel expenses.
Profit after tax grew by 7% YoY to N38.09bn.
✓ Q2 2021 PAT grew by 80% YoY to N22.47bn.
✓ Q1 2021 PAT declined by 32% YoY to N15.62bn.
Asset Quality & Capital Adequacy Ratio
✓ The Group’s total assets grew by 4% to N8.02trn on a year-to-date basis. Meanwhile, total assets grew by 13% year-on-year in H1 2021.
✓ Interest-bearing assets rose by 9% on a year-to-date basis to N5.37trn in H1 2021. On a year-on-year basis, interest-bearing assets grew by 28% YoY.
✓ The Group grew its loan book by 27% YoY to N2.54trn in H1 2021 (+14% YTD), with increased exposure to the manufacturing sector, power, oil and gas downstream, and public sector. The Group restructured 14% of its loan book. However, non-performing loan ratio declined to 7.20% (FY 2020: 7.70%).
✓ Capital Adequacy Ratio (CAR) declined to 15.70% in H1 2021 (H1 2020: 16.50%; FY 2020: 17.00%), on the back of loan growth during the period.
Outlook We revise our EPS forecast to N2.30 for FY 2021 (previous: N1.87), on the back of expectations of sustained higher non-interest income. We posit that interest income will remain weak in the near term.
Based on our expectations of a higher net income for FY 2021, we raise our dividend forecast for FY 2021 to N0.45 (previous: N0.40).
Using a blend of Discounted Dividend Model (DDM) and Residual Income Model (RIM) valuation methodologies, we arrived at a N7.76 fair value. At the current market price, the stock offers a 13% total return (7% price return and 6% dividend yield). We recommend a HOLD.
