As one of the generic brands in the industry, First Bank of Nigeria Holding, FBNH, comes with a pole long reputation and banking pedigree that is tried and tested. Like a northern star, it has been there in thick and thin in the ever dynamic and even hazardous Nigerian banking system. At every critical juncture when some of its peers have had to rescued, FBNH has emerged fairly unscathed.

By age and maturity, FBNH remains an icon of the industry, trusted by the old and respected by the young. However, in modern business environment, age, size and culture can also be a burden where innovation, nimbleness and creativity are demand for optimal performance and competitiveness. These seem to be clearly manifesting in its financials.  

Among its peers, and compared with other Tier 1 capital banks, FBNH profit performance in 2014 ranks fourth out of five in relative term. On a pretax profit basis, the holding company profit performance at N92.9 billion in relation to N4.34 trillion assets value shows there may be lost value addition somewhere in between its lines. Analysts queried whether N92.9 billion profit is sufficient for FBN with N4.34 trillion assets.

FBNH recorded the highest gross earnings, but it has lost significant amount to short term operation cost. The Holding’s pretax profit as a proportion of gross earnings (PBT/GE) in the period reveals some level of cost outrun. The computation shows a 19% PBT to earnings for FBNH, the same level compared with United Bank for Africa Plc.

Access Bank Plc has a ratio of 21%, leaving both FBNH and UBA behind. On the other hand, GTB Plc continues to stand as the pride of banking industry, efficient at managing its cost with 42% PBT to earnings ratio while Zenith Bank Plc ratio berthed at 30%. Invariably, the cost management approach in FBNH ranked low compare with GTB Plc, Zenith Bank Plc as well as Access Bank Plc.

It is evident that there must have been lots of cost drivers eating deeply into the Holding’s earnings. Find it, or unbundled, as size has not been its competitive edge, analysts advised. But the century bank in the financial service sector seems to have discovered few of its missing links as it is clamping down some branches that are overrunning its costs. Instead of being a profit centre, they have turned to cost milking units!

Ordinarily, one would expect First Bank of Nigeria Holding (FBNH) to be the first in the banking industry, if not in everything, but in necessary things measurable. The necessary things include everything that serves the interests of the investors and depositors – its most connected stakeholders.

For depositors, the risk of saving with FBN is the lowest in the industry, but for appealing return on investment, it is not, and cannot be guaranteed by merely looking at FBN size – an elephant in a marathon! FBNH, an embodiment of capacities, resources and potentials where good heads had worked, are working and perhaps will continue to work.

Detail review of its operating structure reveals some attractive things that add feather to FBNH’s cap. The holding company operates with a well diversified shareholders base. Again, it holds well diversified earnings assets, long standing business relations and strong corporate governance with well embedded risk management structure.

The quality of its earnings assets is well rated, its exposure into oil and gas is massive but the bank feels it has rigorous credit appraisal processes.

Though there was a general shift in business focus across the industry with oil and gas exposure plus a shift into foreign currency loans portfolio, however, according to the Group statement, some of its oil and gas transactions, especially in the upstream sector were hedged as a way to provide secondary protection. These exposure related cost of hedging, though necessary, impact on the operating cost.

By 2018, where will First Bank of Nigeria Holding Plc be? Perhaps, the bank’s assets may be valued at N5 trillion in today’s naira value. One thing is sure; the bank will still maintain its position as the First bank of Nigeria by assets. But would it be investment destination that will attract easy funds? Let’s pause! Has it ever been an investment destination of choice?

Let’s look at its numbers in detail. The holdings balance sheet size currently valued at N4.34 trillion is very close to Nigeria’s 2015 budget.

Then, the value of the holding company is massive to the economy – a Systemically Important Bank (SIB) so to speak. Its loan book rose by 20% from N2.2 trillion to N2.64 trillion. As well, the group borrowed funds was augmented to N369.7 billion from N126.3 billion, representing 192.7% increase. This signifies that the bank leveraged on deals that contributed to its bottom line.

External effect rumple income stream

The regulatory headwinds affected FBN operations in several critical ways. The increase in Cash Reserve Ratio, both on the public sector and private sector funds which grew from 12% progressively to 50% and then to 75% on public sector and for private sector, from 12% progressively to 20%.

This, as a Group, has had the impact of about N560 billion sitting at the Central Bank of Nigeria at zero interest rate. But now, the Group seems to be on its feet as other business areas discovery thrives.

The Banking Group also was hit by the introduction of treasury single accounts which is basically taking away collections from federal government agencies away from the banking system into the Central Bank of Nigeria.

Also, FBN said in its presentation that; “The fact that on the cash reserve ratio the Group have N560 billion sitting in CBN earning zero interest rate. That has actually shaved off over N64 billion in revenues for the Group.

Balance sheet size….Significantly expanding!

FBNH’s balance sheet is more than the combination of the six other banks in the industry. But, key financial performance indicators are not showing much advantage compared with the smaller banks. The holding structured bank cost to income ratio is as high as any other marginal players in the banking space for financial year 2014.

The Bank cost to income ratio berthed at 66.6% in 2014, from 62.5% in the corresponding year while cost of funds at 3.8% is just fine, the first mover advantage coming from years of experience as deposit money bank.

The Group, in its presentation, acknowledged that the cost to income ratio actually jumped from 52.7% to 66.7%. 

This is essentially due to an increase in regulatory costs, AMCON costs. AMCON levies actually increased by about 23% jumping to N17 billion while our non performing loans (NPLs) grew by 17% to about N18 billion.

Regulatory costs alone jumped to N30 billion.

Though the cost of risk edged up by 10 basis points to 1% from 0.9% in 2013, it remains the best the industry witnessed as its net margin dropped from 17.8% to 17.2%.

Profit…helped by reduced tax

The Holding’s financial service hub bottom line growth was vague, helped by more than 50% decrease in tax payment. Pretax profit on ordinary business activities moved up miniscule at 1.7% from N91.3 billion to N92.9 billion.  Meanwhile, profit after tax jumped by 17.3% to N82.8 billion from N70.6 billion on account of the reduced tax payment other than on improved performance.

Noteworthy is the fact that the Group enjoyed significant unutilised capital allowance and this enabled the bank to achieve very low effective tax rate. Having used that big chunk, the Group said it is not expecting that significant capital allowances to reoccur, perhaps in 2015.

That is another way to say that FBNH N4 trillion assets yield N82 billion as profit available to the shareholders. Even with the bonus, 10 % annual dividend yield is not attractive for investors holding 32.6 billion shares.

It however, recorded about 66.12% increment in non-interest income from N67.3 billion in 2013 to N111.8 billion in 2014. In the first quarter 2015, non-interest income went up by 52.45% to N29.26 billion from the corresponding year. The surge was powered by foreign exchange transactions gains.

Investors are watching…to buy; to sell

The payout ratio signifies the holding company intention to plough back profit into the Group, perhaps to shore up the lax Basel II Capital Adequacy Requirement (CAR).

That is, the board is aware of the bank adequacy ratio, which at 16.7% is vulnerable against regulatory benchmark of 15%. However, at the bank level, CAR berthed at 15.8%, 0.8% above the CBN’s minimum requirement.

Analysts feel that the Holding company needs to go to market to issue incremental equity. The need for additional capital to shore up its position might have been sole reason why such meager dividend payout ensued as Chief Financial Officer, Adesola Adeduntan, hammered that the need for the Group to improve and enhance retention rate.

Analysts said by paying 10 kobo the bank is essentially paying out just 3.9% of its earnings per share of 255 kobo.  This puts the bank at risk at defaulting and as such further cash dividends payment could just see them fall below the 15% band. In 2004, FBN paid N1.60 as dividend, which is the peaked payment it has made since year 2000.

Four years later, N0.10 was offered as it had done in 2009. In 2012, FBN paid N1.00 as dividend and in some of these periods script bonuses were offered.

Its dividend characteristics dated to early years has not been that attractive even while the market price for its stock is currently below N10. In the period, the drum beat for credit losses caused a jump in impairment charge; thus it wrecked havoc to the supposed beautiful financial scorecard. FBNH recorded a 27.7% increase in credit impairment charge due from seemingly bad credit.

The trend is weighty considering the bank’s loans and advances size of about N2.64 trillion. While loan book rose by 20%, credit impairment charge rose by 27.7% indicating that existing book prior any addition could have been a dirty deal.

And again, because of Assets Management Corporation (AMCON) periodic sunk cost charge, expansion seems to have become a curse for big balance sheet banks like FBNH. Its operating expenses significantly expanded by as much as 27.4%, the rate that is three times the average inflation rate in the economy in 2014.

Two things might have happened in the course of the year that jerked up the holding’s short term expenses. Increased regulatory costs as well as high cost of operating a business can be the answer that curious analysts seek.

Apparently, staff remunerations, cost of maintaining the vast branches and not to mention its huge Directors emoluments. 

Detail review of the Group conference call script made available for this analysis shows that it rising operating expenses is because of size. As such, Ronak Gadhia, analyst at Exotix limited said that there are similar sized banks that have the same increase in regulatory expenses but their operating expenses rose roughly at 40-50%, not 100% as FBNH.

Adesola Adeduntan, Chief Financial Officer at FBN said in the presentation that; “I think one thing that is very key that we have already highlighted is that we are the biggest bank and any time we have this regulatory happenings the impact on us tends to be much more severe.

There is not time today to have CRR overrun by N60b like we have highlighted and invariably that is about N55 billion of lost revenue. Even if we take up of that and you put it into the equation, you discover that the overall picture wouldn’t be as bad as it is looking”.

“At bank level, we are not projecting any growth on our expenses into 2015 and that will give you an idea of the kind of hard stance we are taking”; Adesola added. In 2014, a dividend of 10kobo was paid in addition to bonus script of one share for every ten shareholdings at the time the market price the stock at N16. By value, the script bonus add N1.60 to shareholders income but the will be diluted at the floor because of the market risk.

Loan portfolio – minding the downside

In its financial year 2014 scorecard, FBNH’s assets rose by 12.2% to N4.34 trillion from N3.869 trillion in the corresponding year. The growth was achieved on the back of increased loans and advances which surged by 20% from N2.199 trillion to N2.639 trillion at the end of the financial year 2014.

While loans and advances added spice to the growth in balance size, balance sheet value of investment in securities went down. This could mean that the holding financial service hub divested as much as 13.6% of its holdings or fair value adjustment effect water down the value.

The management team of the bank seems good, perhaps excellent bankers. But the combination of their blue ocean strategy to improve performance has not translated to improve investors gain instead; it size continually expanding.

Bisi Onasanya, the Group Managing Director/ Chief Executive Officer of First Bank of Nigeria assumed office in June, 2009. With years of experience dealings in business and financial operations, Bisi has proved to be a seasoned strategist. Of a fact, Bisi has contributed immensely to the growth but investors are seriously waiting for improve results that have impact on their portfolio. Managing 9,820 employees successfully is not a walk in the park; the employees are among the happy folks around Broad Street.