- Bank in liquidity glut in spite of high CRR, LDR
By JULIUS ALAGBE
On the back of improvement in its balance sheet, the management, FBNH Plc has bolstered earning performance as operating profit jerked up from N65.265 billion in 2018 to about N74 billion in 2019. Of particular interest in the result is the Group’s commitment to tidying up the balance sheet by offloading its previous impairment liabilities but also managing rigorously its risk appetite in spite of regulatory pressure.
Obviously, the bank had to pay some penalty for its apparent stinginess as more of the banking arm deposits were sterilised in accordance with the Central Bank of Nigeria, CBN, regulation regarding the loan to deposit ratio, LDR, policy, but the Group achieved benefits associated with balance sheet efficiency, improved assets quality and brand equity – all of which helped the earnings position in 2019.
Meanwhile, in the stock market, FBNH market capitalisation capped at N215.371 billion on 35,895,292,792 shares outstanding as the stock traded at N6 on Thursday. Whereas balance sheet efficiency came at the cost, there was an aggressive deposit mobilisation that saw customers deposits increased by 15% to N4.004 trillion.
Impairment charges booked in the period was more than half lower than what was booked in the financial year 2018. Though, both stage 1 and stage 2 impairment provisions increased but stage 3 dropped significantly, down by about 278% from N374.681 billion to N97.107 billion.
“The management decision is simply to clean up balance sheet and leave the herculean task of cleaning messes out of its strategic focus”, an equity analysts told Business Hallmark.
The Group’s unaudited financial statement shows that after three to five years of its internal operation restructuring, particularly the release of legacy non-performing assets from its portfolio, earnings have been strengthened. Higher loan volume pushed the Group’s earnings.
Meristem Securities analysts had predicted moderate growth in loan volumes but hoped it would support interest earnings while interest expense should trend downwards. The analysis revealed that the Group raked in N440.622 billion from its portfolio interest yielding assets class as income, rising mere 1.43% from N434.410 billion in 2018.
Analysts observed a surge in the cost of obtaining funds in the period as competition in the banking sector and rivalry among top banks hit peak point in 2019. It was gathered from the account that payment to providers of fund that was used to finance the Group’s interest yielding assets increased 2.66% year on year.
Apparently, the management key strategic decision to pursue balance sheet efficiency as its core focus in 2019 yielded results for the leading financial boutique. Assets quality increased occasioned by a massive decline in the amount of impairment charge on credit losses booked in the year.
Specifically, impairment booked at the Group level slid to N41.711 billion in 2019. This translates to more than 52% decline when compare with N86.911 billion booked in 2018. Analysts at Coronation Merchant Bank had forecasted earnings growth for FBNH in its 2020 outlook. Coronation analysts said they expect FBNH to boost returns as the management has kept a lid on impairment charge provisions.
FBNH has grappled with non-performing loans since the recession of 2015 and had taken significant impairment charges over the last five years. Analysts estimated cumulative impairment charges booked in the period to about N530 billion.
“Most of these impairment charges were derived from exposures into oil and gas clients”, analysts said.
The Group reported a decline in net insurance premium from N15.541 billion in 2018 to N11.388 billion. Harsh economic environment that permeate the whole of the financial year 2019 necessitated an increase in operating expenses. This was derived on the back of increased overhead in assets maintenance as well as personnel cost.
Surprisingly, the Group was able to reduced directors’ emolument in the period from N4.007 billion in 2018 to N3.3 billion in 2019. Both regulatory cost and maintenance expenses steeply increased. Operational and other losses pushed operating expenses up among other overheads like outsourced cost, underwriting expenses etc.
Thus, operating expenses ballooned to N190.364 billion in 2019. This represents a 28.65% increase year on year when compare with N147.976 billion in 2018. At about 4% growth, Profit for the year expanded to N61.947 billion as against N59.667 billion made in 2018. FBNH total assets expanded more than 11% in the year from N5.568 trillion to N6.181 trillion at the end of financial year 2019.
Increase in cash and balances with the Central Bank of Nigeria contributed greatly to the total assets expansion. It was also more likely due to increased cash reserve ratio on account of the bank inability to meet the apex bank loan to deposit ratio.
The unaudited report shows that cash and balances with the CBN berthed at N1.023 trillion as at the end of financial year 2019. In the prior year, it was N653.335 billion.
FBNH note to financial statement revealed that of the sum, N842.928 billion (as against N525 billion in 2018) was the mandatory reserves deposit with the apex bank not available for daily use. This is a percentage of customers deposits held with the CBN. There was a push in loans and advances to customers, surging by 14.5% from N1.683 trillion in 2018 to N1.877 trillion in 2019.
This came at the time when the Group engaged in aggressive customers’ deposits mobilisation. Customers’ deposits surged by 15% year on year, from N3.486 trillion in 2018 to N4.004 trillion a year after. Thus, excluding deposits and loans transaction with banks, FBNH loan to deposit calculation according to the numbers in its unaudited report show that the Group did not meet 65% target set by the apex bank.
By this calculation, loans to deposit sit at 47%, which analysts considered well below the regulator’s benchmark. But the Group financed less projects in 2019 when compared with 2018 in terms of value and of course volume. Project finance dropped by more than 400% from N476.525 billion to N29.059 billion.
However, the unaudited result revealed that overdrafts to customers were boosted. These short-term loans increased by more than 92% from N273.824 billion to N366.036 billion in 2019. That however explained the surge in cash and balances with the CBN in the period. At its earnings conference with analysts in the second half of 2019, the management had stated that it would not build risk assets above its risk appetite.
FBNH reduced its investment securities by 12.87% year on year. In 2018, FBNH invested N1.663 trillion in securities, notably Treasury-Bills, Government Bond and others but regulations and lower yield douse its position. Now, its unaudited financial statement showed total investment securities settled at N1.449 trillion.
To reduce burden of cost on its operation, the management deleveraged the balance sheet. Total borrowing for the year was reduced to N240.308 billion as against N338.214 billion in the comparable period in 2018. By capitalising its retained earnings, FBNH’s strengthened its capital position. Its retained earnings surged to N51.091 billion compared to N4.373 billion in 2018.
At the same time, its fair value reserve of N139.097 billion in 2019 as against N77.276 billion in 2018 helped shareholders fund increase. Overall, FBNH total equity base surged to N642.617 billion in 2019. This represents an uptick of more than 21% above N530.647 billion carry forward into the year in 2018.