Adesola Adeduntan, CEO, FirstBank

By OKEY ONYENWEAKU

At the share price of N6.30 per share as at October 19, 2020, FBNH remains attractive to investors despite all odds. Though N6.30 per share is a little lower than the N6.50 per share earlier in the year, industry analysts believe the right to take position in equities is now.

FBHN stock had opened the year 2019 at N7.80 per share.

 During the boom time that was recorded in 2008, the FBNH stock had traded at the giddy height of N19.20 per share as at November 11, 2008. Business Hallmark research had shown that its stock had also attained N35.00 per share at some time in 2008. This is an indication that the Holdings’ stock appears to be under- valued.

Analysts believe that most of the equities on the price charts of the Nigerian Stock Exchange (NSE) are undervalued and are even penny stocks compared with the prices of stocks in more developed economies. For instance, the highest priced stock on the price charts is Nestle Nigeria, and it is currently valued at N1, 175.00 per share.

On the contrary, one the highest valued stocks on the New York Exchange traded at $312,619 per share as at September 11, 2020  and 31 Group Plc traded at E1,048.00 per share at the London Stock Exchange. But here in Nigeria, it is a different scenario as many stock prices are clearly penny stocks.

As a result, industry experts think that those who want to enjoy good returns in the short to long term should swoop on equities now.

”Valuation on our market is relatively low and this makes the market attractive. But uncertainties at the level of polity, economy and security have consistently dampened and discouraged private equity from participating effectively on the market”, said a chartered broker and Managing  Director, Sofunix Investment and communications Limited, Mr. Olusola Oni

To recall, the group arrangement emerged after First Bank of Nigeria Plc was delisted last week from the NSE in compliance with the Central Bank of Nigeria regulation requiring the separation of commercial banking business from other financial services businesses in 2012.

“The holding company structure is designed to enhance the group’s competitiveness, streamline and coordinate various operations across non-bank financial services, and further exploit opportunities for synergies between subsidiaries. What we now have is a structure that has the potential to do much more for our customers and protect and preserve shareholders’ value through retention of good investments,” the holding company had said at that time.

Ever since then, its management had allayed fears of shareholders and FBN HOLDINGS had hit the ground running and has not looked back.

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 the thick and thin of 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 the modern business environment, age, size and culture can also be a burden where innovation, nimbleness and creativity are demanded for optimal performance and competitiveness. These seem to be clearly manifesting in its financials.

Commenting on the results, UK Eke, the Group Managing Director (GMD) of FBNHoldings said:  “The H1 2020 financial results are impressive and reconfirm our consistent focus on enhanced shareholder value”.

FBNH boss said, “Despite the difficult operating environment, the H1 results demonstrate our resilience and capacity to deliver on long-term ambitions”.

“The 56.3% y-o-y growth in profit after tax for the period is a testament to the strength of our organisation to continually deliver exceptional services to our customers in these unprecedented times.

“We have been able to achieve this feat by leveraging our agent banking network, innovative e-banking capabilities, and operational efficiency utilizing technology”, Eke explained.

Also commenting on the results Dr. Adesola Adeduntan, the Chief Executive Officer of FirstBank and its subsidiaries said: “Over the period, the commercial banking group increased its year on year growth in gross earnings and profit before tax by 6.1% and 9.2% respectively.

This came despite the economic shutdown during the quarter and varying degrees of challenges in the operating environment.

“Notwithstanding, we have continued to provide services to our customers with minimal disruption in a safe environment, supported by seamless transactions through our increasing agent banking network and digital platforms (FirstMobile and USSD)”, Adeduntan explained.

PERFORMANCE INDICES

The times are hard for business in Nigeria. Many companies have recorded decline in their profit margins while others in totally in the red region.

This notwithstanding, 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 deployments 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 a 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 centers. 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 its earnings conference call that its total deposits quarantined is ₦1.6 trillion. By our estimates, Meristem said the 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%.

 ”Yes, ordinarily First Bank is supposed to bounce back to profitability by now since most of the bad debts that they provided for they have almost completely recovered from the provisions. So, the losses have already been booked and they have already taken all the hair cut arising from all the losses. We were expecting that this year they will emerge from those losses and move into the positive terrain. But for this crisis now, and I think the Covid-19 crisis may also have adversely affected them just like every other organ of the economy has been affected.

But what has affected them may just be systemic and not particular to the bank itself. However, I think the bank is stronger now than it was last year” said David Adonri, Managing Director, HighCap Securities Ltd.

We have no grounds currently to fault him.