…improved asset quality, marginal profits signal the Elephant’s growing strength

By JULIUS ALAGBE

First Bank Holdings Plc transition from its previous unwieldy structure to a more nimble, smarter and technologically driven financial institution seems to have gone very well as the bank is being strategically repositioned for modern banking operation. This is evidently showing in its performance, which has seen steady improvement in growth and value for shareholders.

FBNH total assets hit N5.67 trillion in the first half of 2019. It was N5.568 trillion at the beginning of the year. This represents about 2% growth in total assets. Though, analysts said that this is not so impressive, it is still significant considering the improvement in assets value as a result of the management bearish stance on credits creation.

The management stated that net interest margin has also improved to 7.7% from 7.1%. Also, full tax return on equity clicked at11.6% as against 10% for first half of 2019. Strong albeit cheap deposits which account for significant chunk of the group finance mix provides competitive advantage in the market.

As a result, cost of funds was lowered to 3.2% in the first half, down from 3.5% in the corresponding period followed by massive decline in cost of risk from 4.7% to 2.2%. Meanwhile, shareholders fund was expanded by 5.70% from N530.647 billion to N560.917 billion in the first six months in operation in 2019.

This signifies that investors are still confident about future prospect of the Group. Some analysts said that FBNH share price is greatly underprice and expected to see upside in the coming earnings season.

Though, from year to date the stock performance has not been impressive. FBNH stock returned negative just as its other peers in the Tier 1 category. Its year to date return was 32.5% negative; the stock which is currently price at N5.40 opened the season at N7.95 but hit year high at N8.45.

Track record of the Holding’s performance showed that the Group net interest income consistently grew up till 2017 before it hit wall in 2018.

In 2013, FBNH made N213.115 billion from interest earnings assets the same time when it loans book was valued at N1.769 trillion. Due to strong economic temperature in 2014, the Group loan book also surged but began driving downward in 2015.

Though loans book was declining up to 2017, net interest income was rising which means that significant chunk of the interest earnings asset were not from credits to customers but perhaps from high yield government securities. This is more likely than assuming that money rate adjustments pushed the earnings per naira invested in loans up in the period.

As a matter of fact, the nation enjoyed lower interest rate environment up till 2014.
Net interest income peaked in 2017, but did not align with the increase in loans book. This supported the claim that FBNH pushed funds into interest yielding government securities in the period. And that journey to fixed income market had started in 2015, which coincided with the period when the Group loans had bellied up.

Because of heavy loans loss booked in 2015 and 2016, the group profit for the two years was at its worst. FBNH Plc raked in N15.539 billion as profit for the year 2015, the same time when it booked about N119 billion as impairment charge on credits. The same happened a year after, profit closed the period at N17.141 billion on the back of N226.037 billion booked as impairment charge.

BUT the bank is back on track in the first half of 2019. The Group’s loans and advances to customers rose to N1.743 trillion, which happened to be significantly below CBN benchmark of 60%, but loan losses dropped by 58% in the period. This further confirmed the improve assets quality as non-performing loans ratio rested at 14.5% as against 25% earlier.

This came on the back of reduce exposure while recovery process led to outright spinoff of the Group legacy toxic assets –Atlantic Energy. In the second half, FBNH is expected to ramp up credits to customers or pay down some of its deposit, analysts at Coronation Merchant Bank said.

Equity analysts still rate FBNH stock buy. Though, the Holding company’s financial performance came weaker than expected, analysts and investors’ sentiment is strong. However, for its size, about N32 billion profits is small relative to investment in assets. It peers are doubling up some five times or more.

With the headroom available to build more businesses and opportunity to return to oil and gas sector it is expected that such prospects will impact profit in the second half. FBNH is expected to do N67.18 billion post tax profit in 2019, analysts estimated.
Customers’ deposits settled at N3.582 trillion in the first half, which translated to about 3% growth from N3.486 trillion at the beginning of the year.

In the recent past, the amount booked year on year through the income statement as credit charge diluted the Group earnings. Now, the write off of its key toxic assets would provide a breather and give the Holding additional lifeline.

By estimate, FBNH’s profit for the financial year 2019 is expected to hit N67.18 billion. At around 53% loans to deposits ratio, FBNH would require to book loans in order to meet the 60% benchmark. Increase in the interest earnings assets in the second half of the year would likely skew to more loans booking.

Analysts at Coronation Merchant Bank noted that FBNH was unable to keep operating expenses at bay in the first half as cost to income ratio jerked up 1399 basis points to 70.5%. The analysts however reckoned that the 24% increase in operating expenses was influenced by 22% increase in regulatory cost along with advertising and promotion cost.

“We have a target price of N12.50 per share for FBNH and given the potential upside relative to current price of N5.65 per share, we maintain our buy rating on the stock”, analysts at Coronation Merchant Bank stated.

The group net income went down 2% year on year but non-interest income was strong, up 16% and this was largely due to growth in electronic banking fee. The management stated that investment in IT infrastructure significantly impacted operating cost. Legacy issues drag performance for decade.

In the last 10 years, FBNH has been able to grow gross earnings by 8.57% annually. The Holdings’ total assets grew at 9.52% on the average during the periods under review. Customers’ deposits ballooned at an average of 9.68%, while pretax profit grew by 15.64%.

Unfortunately, non-performing loans ratio locked at around 20%, thereby vitiating the value of its risk assets. What that means is that for every N100 in gross loans, some one-fifth faces default risk. In the first quarter of 2019, net loans declined by about 4% from the loans assets brought forward into 2018.

FBNH NPL ratio as at financial year 2017 berthed at 22.8%, and hit 25.9% as at the end of 2018 which suggests that decline in net loans was a deliberate effort to improve the bank’s asset quality. The Group’s cost to income ratio clocked at 59.5%, as against 58% guidance for the year which means that it will cost the Group about 60% on every N100 income. Invariably, FBNH is cost disadvantage if compare with peers in the same class. .

FBNH has carved significant share of the market in the retail end, serving more than 12.5 million accounts, as the numbers show. In its unaudited financial statement for 9-month in 2018, total customers deposits crossed N3.383 trillion.

With footprint across the globe, FBNH has become a household name, sturdy as its logo of an elephant in the banking sector and surefooted in the market by its century old tradition, the bank will play strong going forward. Though, after being on the stock market for about 48 years, FBNH share price is less exciting to investors, closing last week at N7.75, and paid 25 kobo as dividend in 2017.

According to analysts “FBNH shares have not significantly increase in terms of value. In the last seven years, the bank has not paid more than N1.10 as dividend. Technically, except you are trading the stock, its age is not advantageous to building investing portfolio”.