FIRST BANK OF NIGERIA HOLDING PLC : Cost optimization slowly yielding results   

24 April 2019 : Despite commendable improvements in profitability and efficiency, FBNH continues to underperform peers (Tier-1 average) in terms of ROAE and ROAA; a trend analysts see persisting in FY’19. In its FY’18 audited numbers, FBNH posted y/y declines in Net-Interest income and Gross Earnings of 14.3% (N284.2 billion) and 2.0% (N583.5 billion) that translated to a 6.5% decline in operating income to N415.9 billion. 

PAT growth propped by reduced impairment charges 

A 15.8% y/y increase in Non-interest income was not able to offset the decline in core banking or prevent the negative trickle down to operating income, rather y/y PBT growth was buoyed by a 42.2% y/y reduction in Impairment charges to N86.9 billion. The decline in interest income was due to a combination of sharp decrease (15.9%) in the loan book as well as an estimated 50bps contraction in yields on assets occasioned by the depressed yield environment in 2018. Analysts foresee a further contraction in yields for FY’19 and expect FBNH to consolidate on efforts to improve asset quality; as such analysts have modelled a 4% FY’19 growth in loan book and an estimated yield on assets of 11.0% which could see NIMs decline to 7.1% in FY’19 (FY’18 7.5%). 

Non-interest income & Subsidiaries to support growth in FY’19 

The main contributor to non-interest income in FY’18 was fees and commissions, increasing to 70.4% y/y from 65.5% in FY’17. This line item was supported by improvements across the electronic banking fees (N34.0 billion up 36.2% y/y), account maintenance fees (N12.3 billion up 84.4% y/y) and brokerage and intermediation fees (N11.9 billion up 665.9%). In FY’19 analysts expect increased support from groups Merchant Banking and Insurance businesses that contributed N23.3 billion to PBT in FY’18 (FY’19 estimate N31.4 billion). 

Asset Quality to improve in FY’19 

FBNH’s FY’18 NPL ratio worsened to 25.9% from 22.8% (FY’17) due to the migration of risk assets from stage1 and stage2 to stage3 between January 2018 – December 2018. ECLs of N483.1 billion in FY’17 declined to N385.5 billion in FY’18 following a N186.5 billion write off during the year. The banks largest exposure – Atlantic Energy was fully provisioned for with adverse impact on Shareholders’ Funds that declined 21.2% y/y to close at N530.6 billion (FY’17 N673.7 billion). It is note worthy to mention that the Oil & Gas obligor has been the dominant non-performing exposure in the bank’s loan book over the past 5 years, consequently, analysts expect marked improvements in FY’19 NPLs with expected signals in Q2’19 following the 3-month waiting period to reclassify ECLs. 

Outlook and valuation: FBNH currently trades at a P/B multiple of 0.4x a 50.6% discount to peer average, while analyst's forward EPS of N1.69 and implied fair value estimate of N13.55 for the bank, presents a potential upside of 77% to market price N7.65 and place a BUY recommendation for the stock. 

Reporting for EasyKobo on Wednesday , 24 April 2019 in Lagos, Nigeria

Source: Usoro Essien from Vetiva Capital Management Limited

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