Earnings Flash: First Bank Plc - 3 months ended 31st March, 2012
Category: Investors NewsBeat
Thursday April 3 2012
· First Bank Plc (FBN) reported 42% YoY growth in turnover to N92.3bn for the 3 months to March 2012. PBT and PAT came in at N29 billion and N24.7 billion, indicating YoY growth of 102% each.
Actively seeking yield
·FBN reported 51% growth in interest income while non-interest income rose 27%. Government securities rose 54% YoY to ~N720 billion in what FBN characterized as a deliberate effort to capture higher yields in this segment. Higher rates and conscious re-pricing also impacted FBN’s N1.3 trillion as loan yields increased 430bps YoY to 15.1%. Consequently, income from these categories rose 132% and 45% respectively, driving the strong growth in interest income. Furthermore, the bank continues to benefit from a swap of ~N150 billion money market lines into customer loans in 2011.
·Non-interest income growth was largely driven by fees and commissions which rose 24%, supported by service charges and increased transaction volumes.
·FBN explains that the significant strength in interest income was enhanced by some differences in IFRS relative to GAAP which resulted in some credit related fees being classified as interest income. Adjustments to interest in suspense accounting and application of market rates to some subsidized loans such as staff loans also played a role, the net impact being that interest income was N8.4 billion stronger than it would have been under Nigerian GAAP.
Competition impacts funding costs
·Deposits rose 31% YoY to N2.1 trillion leading to a 35% jump in interest expense to N12.7 billion, aided by higher rates. FBN also acknowledged intensifying competition as cost of funds increased ~10bps YoY and ~40bps QoQ to 2.1%. Much of the 6% YTD growth was driven by term deposits which FBN characterized as reflecting “changing customer preferences in a sustained high interest environment.”
Opex and provisioning still elevated
·Opex rose 32% YoY to N45.2 billion, reflecting costs related to ongoing efforts to expand footprint in line with a renewed strategic focus on organic growth. During Q1 2012, FBN opened 21 new business locations and deployed 111 additional ATMs and 2,411 Point of Sales (POS) terminals. In spite of this, our estimates put cost-to-income ratio for the quarter at 57% which is a substantial improvement from 64% in Q1 2011, reflecting stronger relative revenue growth.
· FBN booked charges of N5.4 billion in Q1 2012 (+19% YoY) which management attributed to “proactive classification of impaired loans as well as timing delays in some loan repayments”. Consequently, management expects to write back some portion of this in future.
· In all, cost pressures were better controlled helping to translate much of the improvements in top line to the bottomline. YoY PBT and PAT margins rose 600bps and 700bps to 31% and 27% with even more significant 14ppt and 12ppt improvements QoQ.
Strategy appears to be paying off
· FBN’s strategy of driving revenue growth by expanding footprint while simultaneously using enhanced service delivery as a basis for increasing both pricing and transaction volumes appears to be yielding fruit. According to management, the investment in infrastructure in Q1 2012 resulted in an increase in the “number of customer accounts by 300,000 to over 8 million” . It also reported a 900,000 increase in the number of cards issued to 5.2 million, and a 4ppt rise in card activity rate to 80%. Thus we expect FBN to leverage on its scale and growing customer to drive non-interest income.
·Although cost of funds worsened marginally in line with our expectation for the industry, the impact on FBN’ appears to have been the least among Tier 1 peers (QoQ: UBA: 40bps to 3.2%; GTB: 80bps to 3%; ETI: 135bps to 3.4%). Moreover, FBN has restated its focus in generating low-cost deposits which still constitute 83% of deposits. In this regard, renewed efforts through product launches targeted specifically at the unbanked segment of the population could widen the advantage over peers.
·Although opex remains elevated, we anticipate some moderation as the bank’s infrastructure investment decelerates. In addition, the centralization of some back end operations should bring about some improvements. Management estimates the latter resulted in savings of ~N1bn in the quarter.
· However, despite of management’s interpretation of current charges we believe provisions could linger though its quantum may moderate relative to revenues. Improvements in coverage to 113% (NPL: 2.7%) from 104% (NPL: 2.6%) in December also provides some buffer.
·Overall, reported results are much stronger than we envisaged with profitability well poised to significantly exceed our initial estimates. Consequently, the net impact of our revisions has been earnings accretive though tempered by a higher tax rate than management anticipates as well as our more conservative provisioning.
Still attractive on valuation
· At current price of N10.99, FBN retains significant upside potential of 50% relative to our fair value estimate of N16.43 which is an upward revision from N15.5 previously. FBN trades at current PE of 6.3x and P/Bv of 1x compared to industry averages of 11x and 1x, respectively. The stock is also currently priced at 5.5x 2012EPS which we find attractive.
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