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FBNH: Making hay in stormy weather



…as CBN sterilized N1.6 trillion in H12020


In the first half of 2020, FBN Holdings Plc. (FBNH) sustained its earnings momentum from the first quarter, although growth was at a much slower pace due to the outbreak of coronavirus. However, the Group’s earnings profile has been raised on the back of an increased digital footprint in electronic business, which has been further supported by higher than peers’ agency banking networks.

Analysts at Meristem Securities explained that this was off the back of a weak second quarter scorecard, which portrayed the impact of the pandemic on its business. Specifically, gross earnings growth slowed to 5.82% from 14.50% in the first quarter, fueled largely by 37.2% quarter on quarter decline in non-interest income and 2.28% drop in interest income.

Analysts, however, said the dip in interest income is unsurprising given the current yield backdrop, triggering further depression in the company’s asset yield to 10.80% as against 11.40% in the first half of 2019. Non-interest earnings in the second quarter were impacted by a foreign exchange loss of ₦6.22 billion and fair value losses on financial assets, which halved overall non-interest income growth to 40.41% compare to 83.15% in the previous quarter.

Notwithstanding, Meristem Securities said it likes the sustained growth momentum in its fees and commission income which surged +13.70% year on year, underpinned by improved e-transaction volumes and higher letters of credit transactions. Also, trading income was lifted +601.33% having benefitted immensely from the volatility in asset prices during the first half of the year.

In the period, the bank maintained its cost optimization strategies, as analysts observed improvements across most of its cost centres. Interest expense fell by 29.48% quarter on quarter, slowing funding growth to 1.44% from 17.91% in Q1:2020. Meristem said this moved in line with expectation, given the current low interest rate regime, which was further enhanced by the 100 basis points (bps) reduction in the MPR in May.

“We saw cost of funds fall to 2.80% from 3.2% in the first half of 2019. However, this was insufficient to prevent a 70bps contraction in net interest margin to 6.80%”equity, analysts explained.

Similarly, operating expenses remained flat, surged marginally by +0.90% year on year at ₦139.17bn, with Cost to Income ratio (CIR) falling to 65.80% from 70.30% in H1:2019.

“We observed an increase in Cost of risk by 90bps to 3.10%, which is attributed to the weakness in the general economy, along with the impact of FX translation on foreign currency loans”, analysts said.

Nevertheless, net profit from operations grew by 23.84% year on year, while the profit from sale of its Insurance subsidiary of +₦11.26bn further bolstered net profit growth for the period to 56.33%.

LDR non-compliance brings regulatory backlash

At earnings call with analysts, FBNH said its ₦1.6 trillion has been sterilized due to the Central Bank of Nigeria’s cash reserve ratio debits. The financial service supermarket grew its balance sheet significantly by 14.94% to ₦7.13 trillion, which was funded by 8.79% increased in customer deposits and 38.61% surge in bank deposits year to date.

However, analysts at Meristem Securities observed that more of its funds totaling ₦797.03bn were sterilized into mandatory reserve deposits during the first half, as the bank failed to meet minimum LDR requirements.

Meanwhile, FBNH told analysts at earnings conference call its total deposits quarantined ₦1.6 trillion. By our estimates, Meristem said lender’s LDR dipped by 48bps to 45.60%, which is well below the required minimum of 65%.

“Given the bank’s pragmatic stance towards loan growth, we expect LDR to remain around current levels in the second half”, analysts projected.


Meanwhile, the sustained downtrend in NPL ratio to 8.80% from 9.90% in 2019 excites analysts at Meristem Securities Limited. This came despite the weak macroeconomic environment, while the improvement in its Capital Adequacy Ratio to 16.50% from 15.50% in 2019 provides further comfort.

“We upgrade our expected earnings per share (EPS) to ₦2.43 from ₦2.00, following the completion of the divestment, and maintain our target price target of 2.87times, which yields a December 2020 target price of ₦6.97”, Meristem stated.

In its equity analysts’ note, Chapel Hill Denham Limited said non-interest income bodes well for profitability in the period. Chapel Hill’s analysts Aderonke Akinsola noted that the 46.8% year on year growth in non-interest income in H1-20 was largely driven by strong net gains on sale of investment securities, which grew by 6% to ₦26.32bn in H1-20).

 Management attributed the strong growth in net gains on investment securities to the significant volatility in the financial market during the period. Chapel Hill Denham noted that investment securities – mainly treasury bills – fell by 15.6% year to date as at H1-20. This happened on the back of sustained market volatility amid subdued yields.

However, Chapel Hill analyst, Akinsola added that this could result in further gains on sales of investment securities in second half of 2020. The 13.7% growth in fee and commission income also supported the improvement in the contribution of non-interest income to gross earnings in the first half of 2020 – from 19.5% in the first half of 2019 to 27.0%.

At the growth rate of 82.1% year on year, analysts said credit-related fees were the major driver of fee and commission income growth in H1-20. This reflects increased lending, as gross loans increased by 7.3% year to date, mainly driven by the manufacturing and trade sectors.

 Though, FirstMonie gained momentum, electronic banking income was flat in H1-20 as reduction in fees offset the impact of volume growth. However, Chapel Hill analysts recognized that FBN’s growing agent banking network continued to support electronic banking income in the period.

The number of agents grew by 114.8% to 59,024 while the revenue from these agents increased by 109.0% in H1-20. The contribution of agency banking to e-business revenue improved to 29.3% in H1-20 from 13.9% in H1-19. Chapel Hill said foreign exchange loss of ₦3.59bn in H1-20 compare to FX income of ₦4.78bn in H1-19 was a drag on non-interest income.

Analysts at Chapel Hill Denham however forecast 11.1% year on year growth in non-interest income for financial year 2020. Akinsola stated that management’s cautious lending and continued focus on driving revenue from the agent banking network will likely support stronger non-interest income as the economy gradually reopens and consumer spending improves.

In spite of the upside, analysts estimated that net interest margin and asset quality could remain under pressure till year end.

 “We expect the low interest rate environment to continue to impact net interest margin (NIM) negatively in H2-20E and estimate that NIM will decline by 60bps”, analysts said.

 Notably, NIM moderated to 6.8% in H1-20 from 7.5% in H1-19, despite the 40bps drop in cost of funds, as the decline in yield on assets was sharper at -60bps. Chapel Hill projected that lender will sustained mobilisation of cheap deposits drive in the year due to aggressive marketing.

The breakdown of the results indicated that cheap deposits accounted for 87.2% of total customer deposits in H1-20 from 85.7% in the comparable period in 2019, which analysts considered as an upside risk to net interest margin. Analysts forecast that cost of risk will rise to 3.5% in 2020 from 3.2% previously after the spike to 3.0% in H1-20 from 2.3% in H1-19.

However, it was noted that higher impairments recorded in H1-20 were due to the translation impact of foreign currency loans – which was up 49.0% from 45.8% in H1-19 – after devaluation of the Naira and weak macro conditions.

Amid cautious lending, the management indicated intention to continue to actively pursue recoveries of loans written off. Chapel Hill stated that limited exposures to sectors that will be mainly impacted by COVID-19 as well as restructuring of the loan book are upsides for asset quality in 2020.

Analysts at Chapel Hill maintain BUY rating on FBNH, but cut our 12-month TP by 4.5% to ₦8.27, which translates to an expected total return of 71.6%, comprises capital gain of 64.1% and dividend yield of 7.5%.

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