06 August 2018 ( Lagos ): The gale of defection hit on analysts views on FBN Holdings Plc (FBNH) after discussion with management on the back of its half-year 2018 results. Cutting to the chase, analysts increased their FY 19E impairment charge by N36.2 billion to a total of N120.8 billion in the period, as analysts are now less cheerful on the largest NPL in its loan book (~26.5% of NPL), Atlantic Energy, which is about N120 billion (6.5% of loan book).

At the start of the year, analysts were more optimistic on the bank getting approval from the FG to sell its step-in rights to a strategic partner, though analysts took a more cautious stance by modelling a reclassification in 2019. Thus, analysts had earlier projected FY 19F CoR (cost of risk) and impairment charge of 4.0% and N83 billion respectively (FY 18E: 6.0% and N117 billion). However, from their last engagement with management, it looks like a less optimistic case for Atlantic Energy, and the tone implies possible actions will be explored in 2019 if there is still delay with the required approval. 

As it stands, management noted that it has provided for 30% of the loan (N36 billion). Consequently, analysts are projecting a case wherein the bank provides an additional 30% of the loan in 2019, which brings CoR to 5.7% and FY 19E impairment charge of N120 billion. Net adjustment to their forecast brings FY 19E EPS to N2.19 (previously: N3.02) and ROE of 9.8%.

For 2018, analysts have revised their asset yields downwards by 20bps to 13.1%, which brings interest income slightly lower to N459 billion (previously: N468 billion). Aside that, analysts maintain all other assumptions. First, in line with expectation, management has revised its loan growth forecast from 7-10% to 5-7%. However, analysts maintain their 2% YoY decline in loan growth, as analysts expect a cautious approach to loan growth over H2 2018 – net loans declined 7% YTD. 

Also, analysts maintain their NPL ratio forecast of 18% as analysts expect loan growth in H2 2018 to support the decline – NPL ratio has been relatively sticky due to the decline in net loans. Further down, analysts retain their impairment charge estimate of N117 billion (-22% YoY), annualized impairment charge in H1 18 of N52.8 billion prints at N105.6 billion and lower than their estimate. Their FY 18E EPS now prints at N1.70 (prior: N1.88) and ROE of 8.2%.

Net impact of their overall adjustment translates to FVE of N12.86 (prior: N14.40). That said, at current pricing of N10/share, FBNH remains a STRONG BUY with 29% potential upside. FY 18E price-to-book (P/B) of 0.54x is undemanding, and at a 44% discount to Tier 1 average of 0.9x. While there is a case for a justified discount, analysts think based on performance, ~15% valuation discount is a worst-case gap for FBNH relative to peers.

Management Update. At the conference call, management gave the following update.

Bond Issuance. Management noted that the bond redemption will have no impact on capital and that the bank is in a strong position due to surplus equity. Thus, no plan to raise Tier 2 capital in the near term.

Non-performing loan. Management hinted on possible write-backs in the third quarter. In their view, analysts expect this to come from Ontario assets which was written off in June last 2017 with the collaterals in the bank’s possession and sale process ongoing with documentation about to be concluded. Thus, analysts expect the bank to write back the proceeds recovered from the sale of the collaterals. Also, management guided to possible NPL reclassification in H2 18.

E-Banking. Management indicated that the bank has recorded strong growth in USSD and Mobile banking, and now boast of ~10 million transactions worth over N20 billion daily, with transaction value of NN886 billion in H1 2018.

FCY Position. While FCY liquidity will be impacted by the repayment of Eurobond, analysts expect the bank’s FCY position to remain stable as the bank has been building up its FCY liquidity ahead of call option exercise. From their estimate, the bank is net-long dollar to the tune of ~$650 million.

Reporting for EasyKobo on Monday ,06 August 2018 in Lagos, Nigeria

Source: ARM Securities Limited

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