FBN Holdings Raises Shareholders’ Hopes

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Goddy Egene writes that the growth reported by FBN Holdings Plc in its nine months’ results has given shareholders hopes of a higher dividend payout at the end of 2017

FBN Holdings Plc is one of the blue chip stocks on the Nigerian Stock Exchange (NSE) given the fact that it is the parent firm of First Bank of Nigeria Limited. Every investor would want to have FBN Holdings in its portfolio because of the many prospects.

However, in terms of dividend payment, many holders of the stocks have been disappointed in recent times due to the low dividend they have been receiving, compared with its peers in the market. FBN Holdings have not been able to pay high dividend because of the decline in profitability. While some of its peers recorded increases in bottom-line, FBN Holdings suffered profit decline, majorly due to high provision for loans losses.

At a point, it became a major issue and challenge for the board and management of the company, which took it upon themselves to tackle the matter. FBN Holdings then assured stakeholders that a robust risk management strategy was being adopted to ensure that the performance of the company change for the better going forward.
However, going by the nine months results of the FBN Holdings, things are beginning to look up for the financial institution rekindling shareholders’ hopes for higher returns at the end of the year.

Financial results
Details of the results showed that gross earnings rose by 5.2 per cent to N439.2 billion, from N417.4 billion in the corresponding period of 2016. Net interest income went up by 25.3 per cent to N254.3 billion from N202.9 billion, while non-interest income went down by 43.5 per cent from N131 billion in 2016 to N74 billion.

The gross earnings were largely driven by a 27.8 per cent growth in interest income. This was partly offset by a 43.5 per cent decline in non-interest income. Interest income and non-interest income contributed 81.3 per cent and 18.7 respectively. The growth in interest income to gross earnings was driven by increased investment in securities.

Impairment charge for credit losses fell by 14.9 per cent from N114.7 billion in 2016 to N97.6 billion in 2017 as the financial institution continues to progress on remediation and recoveries as well as asset quality strategies. Consequently, cost of risk decreased to 5.6 per cent (Sept 2016: 6.9 per cent); while the non-performing loans ratio declined to 20.1 per cent September 2016; 24.9 per cent December 2016.

FBN Holdings posted profit before tax (PBT) of N55.4 billion, down marginally from N57.5 billion, while PAT rose by 7.8 per cent to N45.8 billion compared with N42.5 billion in the corresponding period of 2016.
Total assets went up by 2.7 per cent to N4.9 trillion, up from N4.7 trillion, while customer deposits fell by 5.3 per cent to N3.0 trillion, from N3.1 trillion. Similarly, loans and advances to customers stood at N2.0 trillion, compared with N2.1 trillion.
Further analysis of performance ratio showed that post-tax return on average equity improved from 9.4 per cent in 2016 to 10.1 per cent in 2017.Net interest margin improved from 7.5 per cent to 8.8 per cent.

Also, non-performing loan ratio stood at 20.1 per cent, compared with 24.9 per cent in 2016. Total customer deposits declined by 5.3 per cent N2.9 trillion at September 30, 2017, down from N3.1 trillion in December 31, 2016, as the company focused on growing inexpensive deposit at the right mix.
FBN Holdings said the group’s deposit base remains overall stable and strong with a growing retail franchise and about 13 million active customer accounts.

Similarly, net total loans & advances to customers declined by 1.9 per cent to N2.0 trillion, from N2.1 trillion, following repayments and write-off of assets that had been fully impaired. According to the company, this result speaks to the efforts being made to strengthen asset quality in a sustainable manner while cleaning up our legacy asset position.

Company explains performance
Speaking on the results, the Group Managing Director of FBN Holdings, Mr. UK Eke said: “FBN Holdings has again demonstrated its resilience in revenue generation with a 5.2 per cent y-o-y growth in gross earnings to N439.2 billion following a y-o-y increase of 25.2 per cent in net interest income to N254.3 billion. The Group is progressing in building the right structures for sustainable growth through an improved credit culture and risk management; increased technologically driven operational efficiencies; and the introduction of revenue enhancing platforms.”

He explained that the Insurance group sustained its strong performance and they expect to see further growth from the retail, corporate and annuity businesses.
“Similarly, we continue to see strong growth trajectory in the Merchant Banking and Asset Management group. These businesses complement our commercial banking business in our aspiration to becoming the leading financial services institution in Middle Africa. We remain confident that the initiatives being implemented across our subsidiaries will further strengthen our business and ultimately reposition the Group for sustainable growth,” Eke said.

Commenting on the results, the MD/CEO of First Bank and subsidiaries, Dr. Adesola Adeduntan said: “On the back of a stronger balance sheet and despite the challenging but improving economic environment, the commercial banking group delivered a 4.5 per cent growth in gross earnings – a testament to its resilient revenue generation capabilities.

“To further support future revenue generation and in line with our strategic imperatives to reposition the commercial banking business, we are expanding our digital banking initiatives and transforming our business model to increase customer acquisition and retention, providing a renewed customer experience. To improve profitability in a sustainable way, the Group is increasingly optimising its cost base, leveraging on technology. In addition, good progress is being made in strengthening the credit processes end to end and improving the quality of the loan book while resolving the legacy assets.”

Analysts’ assessment
Assessing the results, analysts at Cordros Capital said the growth in earnings is broadly supported by growth in funding income and decline in operating expenses. According to them, gross earnings grew by 5.17 per cent, in line with their estimate.

“While PBT declined 3.52 per cent, PAT grew by 7.81 per cent, both above our estimates of -6.82 per cent and -1.85 per cent respectively. The marginal growth in gross earnings over the period broadly reflects the impressive yield on interest earning assets (+210 bps to 12.28 per cent) and consequently, robust interest income, which more than offset the significant decline in net interest revenue (47.08 per cent).

Cordros Capital explained that despite 1.90 per cent contraction in NPLs to 20.10 per cent compared to H1-17, annualised cost of risk remains elevated, rising 20 bps to 5.60 per cent (annualised) following additional provisioning of N35.18 billion in Q3-17, which raised total loan loss provision during the period to N97.69 billion, albeit 14.93 per cent lower compared to N114.72 billion in 9M-16. “However, noteworthy is the 90.08 per cent growth in net recoveries from loans previously written off (with an additional recovery of N1.32 billion over Q3) which we believe reflects the gradual improvements in the general commerce and manufacturing sectors following increased FX liquidity. FBNH reported Capital Adequacy Ratio (CAR) of 17.8 per cent for the bank in FY-16 and 17.6 per cent for H1-17. Relative to both periods, CAR contracted to 17.2 per cent in 9M-17, though still largely above the required regulatory minimum of 16 per cent for systemically important banks,” they said.

Analysing further, Cordros Capital said for the rest of 2017, they expect interest expense will remain elevated, as liquidity pressure (liquidity ratio was down to 47.4 per cent in 9M-17, from 50.4 per cent and 52.7 per cent in H1-17 and FY-16, respectively) persists.
According to the analysts, with the United States Feds rate hike impact on the LIBOR further compounding the already stretched local currency (LCY) interest rate.

“Although we expect the re-pricing of assets, higher yields on investment securities, and FX interest income to support NIM, risk asset creation will remain subdued as the bank takes strategic steps to clean its loan portfolio. On impairment charges, the bank’s restructuring of some foreign currency (FCY) obligations reflected in the contraction in NPL during the period. We expect this to contract further, as the bulk of the upstream oil and gas reclassification reflects in the balance sheet, resulting in lower provisioning by full year (FY)-17 in line with our previous forecast,” the analysts said.