FBN Holdings: Improving Risk Management

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Goddy Egene writes that the strategies adopted by FBN Holdings to reduce its non-performing loans are already yielding results, as the financial institution recorded lower impairment charges for the half-year ended June 30, 2017

The Managing Director of FBN Holdings Plc, Mr. Urum Kalu Eke last June told the capital market community that the financial institution was working hard to improve on its non-performing loan (NPL) ratio from the 26 per cent recorded in 2016 to below 20 per cent this year.

Eke gave the assurance during the company’s fact behind the figures presentation at the Nigerian Stock Exchange (NSE). The assurance became necessary following an unprecedented rise in the NPL due to impairment charges of about N226 billion in 2016. Going by the half year results of FBN Holdings released last week, the company is on its way to fulfilling that promise of reducing NPL.

FBN Holdings recorded impairment charges of N62.9 billion in H1 of 2017, down from N69.9 billion in the corresponding period of 2016. NPL stood at 22.8 per cent in H1 of 2017, an improvement on 24.4 per cent as at December 2016 and 26 per cent as at March 2017.

Half Year Financial Performance
FBN Holdings’ gross earnings grew by 7.8 per cent from N267.9 billion in 2016 to N288.8 billion in 2017, driven essentially by a 37.3 per cent growth in interest income, which was partly offset by a 46.3 per cent decline in non-interest income.
Net-interest income improved by 30.2 per cent to N164.1 billion, up from N126.1 billion in 2016; following enhanced interest income opportunities from treasury activities along with improved yields on the loan book.

Interest expense, however, increased to N68.3 billion, from N43.2 billion.
But net-interest margin increased to 8.5 per cent from 7.2 per cent in the prior period. Fees and commission (F&C) income, represented 72.8 of total non-interest income, in 2017, compared with 36.9 per cent in 2016. The growth in F& C income was driven predominantly increase in electronic banking fees to N10.6 billion (N10.4 billion in 2016); a 35.5 per cent growth in other fees and commission to N10.5 billion (N7.7 billion in 2016); and, to a lesser extent, an increase in credit related fees, funds transfer and intermediation fees, and letter of credit commission and fees.

Electronic banking fees sustained its high contribution to F&C at 28.8 per cent (29.8 per cent in 2016). The company said it expects further growth on the back of improving foreign exchange liquidity and services through alternative channels.

FBN Holdings ended the period with cost-to-income ratio of 54.4 as against 47.4 in 2016.
“Though within our guidance, the higher ratio in the current period reflects a normalised performance from the one-off foreign exchange revaluation gains of the previous period. We remain optimistic on further efficiencies in our business following the implementation of a number of initiatives within the group,” the company said.
Net impairment charge on credit losses declined to N62.4 billion as its asset quality improves and it continued to make progress in its remediation, recoveries and other portfolio management initiatives.

Cost of risk decreased from 6.5 per cent to 5.4 per cent while NPL ratio closed at 22 per cent.
According to the bank, during the quarter, one of the top NPLs, previously provisioned, was written off (not charged –off) with significant progress made on realisation of assets for full recovery, while it will expect a reclassification of another major NPL in the next quarter.

Profit before tax closed 22.4 per cent lower at N35.6 billion, down from N45.9 billion in 2016, while profit after tax (PAT) stood at N29.5 billion, as against N35.9billon in 2016.
The bank thus recorded post-tax return on average equity of 9.9 per cent and post-tax return on average total assets of 1.2 per cent. However, according to company, in view of its current initiatives, it is optimistic of enhanced performance in the remaining half of 2017.

MD Explains Results
Commenting on the results, the Group Managing Director, FBN Holdings, Mr. Eke said: “FBN Holdings has again demonstrated its strong revenue generating capacity in the current economic environment reporting gross earnings of N288.8 billion – up 7.8 per cent. In line with our strategic focus on improving asset quality; cost optimisation; and, enhancing revenue generation, we are beginning to see improvement across a number of metrics associated with these initiatives.

Our focus on enhancing the quality of our loan book is reflected in a decline in non-performing loans, a reduction in our impairment charge following improvement in the asset quality outlook, and we will continue to prioritise this area through the rest of this year. Similarly, consistent improvement in the efficiency ratio is testament to the efficacy of our cost optimisation initiatives, though these results have been partly offset by the currency devaluation and high inflationary environment.

“Overall, we have seen strong growth trajectory in our Merchant Banking & Asset Management and the Insurance Group. These businesses complement our Commercial Banking franchise and represent new frontiers for our Group, firmly supporting our aspiration of becoming a leading financial services institution in Middle Africa. We remain committed to maximising returns to our shareholders as well as creating sustainable value.”

A further analysis of results showed that total assets increased by 3.0 per cent to N4.9 trillion, up from N4.9 trillion as at December 2016, this was essentially driven by an increase in investment securities and other treasury activities.
Specifically, investment securities increased to N1.26 trillion, up from N1.25 trillion in December 2016. Loans to banks grew to N731.2 billion, a growth of 64.4 per cent from N444.9 billion at year end.

Total interest earning assets grew by 5.6 per cent to N3.9 trillion from N3.7trillion, representing 81 per cent of total assets. Total customer deposits declined by 3.5 per cent to N3.0 trillion, from N3.1 trillion in December 2016, as the bank focus on ensuring an appropriate deposit mix at an optimum price.

Savings deposit, representing 32.4 per cent of total deposit, grew by 1.9 per cent to N971.1 billion, from N952.7 billion in December 2016.
This, the bank said, reflected the strength of its retail franchise and the ability to keep attracting a well-diversified funding base despite the difficult but improving market condition.
Total loans & advances to customers (net) declined marginally by 4.1 per cent to N2.0 trillion, compared with N2.1 trillion in December 2016.

According to the bank, this was driven by repayments, portfolio rebalancing and write-off of assets that have been fully impaired as “we remain focused and deliberate in growing good quality risk assets supported by our revamped risk management framework.
“The sectors that contributed to the decrease in loans were essentially in oil and gas, manufacturing, public sector and general. We are making significant progress towards achieving our strategic targets. This is evident in the decline in the non-performing loans to 22 per cent from 26 per cent in the last quarter, and we expect this trend to continue over the coming quarters,” FBN Holdings said.

Shareholders’ funds closed at N609.9 billion, up 4.7 per cent from N582.6 billion.
Capital adequacy ratio for First Bank (Nigeria) closed at 17.6 per cent, while the Capital adequacy ratio for FBN Merchant Bank closed at 26.7 per cent above the 10 per cent required by regulation for merchant banks.
Liquidity ratio for First Bank (Nigeria) closed at a healthy 50.4 per cent above the 30 per cent regulatory mark.

In terms of contributions from business segmentations, the commercial banking business contributed 90.3 per cent to gross earnings of the Group and 78.3 per cent profit before tax.
Commenting on the results, the MD/CEO of First Bank and subsidiaries, Dr. Adesola Adeduntan, said: “The Commercial Banking group proved its overall earning capacity with a 6.9 per cent increase in gross earnings to N260.9 billion mainly driven by our core business operations with stronger margins. At the same time, we intensified our credit resolution efforts resulting in the improvement of the asset quality position with the reduction in NPLs from 25.7 per cent in the last quarter to 21.8 per cent at the Commercial Banking group. We are optimistic about further improvement in asset quality and the general quality of the loan book in the next half of the year, we will be driving enhanced revenue generation, efficiencies and profitability towards an overall improved performance, while remaining focused on sustaining the portfolio management efforts.”