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Asset Quality Challenges Continue to Bite FBN Holdings Earnings, retain BUY

Proshare

Friday, November 04, 2016 5:49 PM / Cordros Capital

Last week, FBN Holdings Plc (FBNH) released its nine months earnings report for the period ended September 30, 2016. Profit before tax (PBT) declined by 5.0% y/y (-51.4% q/q) while return on average equity (RoAE) fell to 9.4%, from 12.0% recorded as at H1'16. Following revisions to our estimates, we downgrade our TP to N4.16 (previous N5.00) and retain our BUY recommendation, given the potential upside of 37.29% based on its current price of N3.03.

We have revised our 2016 EPS and RoAE forecasts lower to N1.21 and 7.3%, from N1.62 and 9.7% respectively. Also, while we expect FBNH’s FY’16 PBT to grow by 129.8% y/y. Our forecast implies a loss of N8.1 billion in Q4’16, given our expectation for continued pressure on the asset quality, combined with lower foreign exchange gains to support non interest income.

Specifically on asset quality (the major driver of the cut to the earnings projection), our cost of risk and NPL expectations have been increased to 6.5% and 24% (previously 4.6% and 21.0%) and are now more reflective of management guidance. This follows a negative surprise in Q3’16 impairment charges which overshot our estimate by 116.2%. For 9M’16, FBNH reported an increase in cost of risk and NPL ratio to 6.9% and 24.9%, from 6.5% and 22.8% respectively as at H1’16.

On a positive note, we have revised our net interest income forecast higher after it outperformed our estimate by 32.4%. The major driver for the deviation was the outperformance in cost of funds which increased at a much lower rate in comparison with our expectation. Hence we have revised our estimate to match Q3’16 which we believe will be reflective of Q4’16 performance barring any major changes major changes in the monetary environment.

While we expect Q4’16 to be particularly pressured, we expect that the capitalized earnings for the full year should provide enough buffers to help maintain FBNH’s capital adequacy ratio above the 15% regulatory requirement.

Price / Returns

Target Price              (N)4.16

Current Price           (N)3.03

Implied Return        (%)37.29

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