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FBN Holding Plc. Earnings Update -Huge Impairment charges, TP cut down to N3.21, downgraded to Hold


Thursday, November 10, 2016 5:02 PM / CardinalStone Research

FBN Holding Plc. (Revised TP: N3.21, Rating: Hold) held its  conference call on the 26th of October, 2016. Please see below the group's 9M'16 performance update and key highlights from the call.

NPLs - still a big concern
FBNH impairment charges have been rising rapidly in the past one year. As at 9M'16, FBNH reported N114 billion in credit impairment charges following the N119.3 billion recorded in FY'15. Despite the huge impairment charges, loan coverage ratio remains significantly low at 43.6% - far below industry and peer average of 110% and 124% respectively.

This signifies that just below half of the bank's non-performing loan is adequately provided for as at 9M'16. Hence, we anticipate further rise in impairments by FY'16. On the $400 million Atlantic Energy loan, management said that the recovery progress was significantly slower than anticipated.

We think the current challenges in the upstream oil & gas sector coupled with the cloudy outlook for crude oil prices may stall the remediation of this loan and management may have to increase the credit provisions for the loan by FY'16.

However, there was good news on the Aiteo's credit facility as the company ramped up production from 20,000 bpd to 90,000 bpd. According to management, the restructuring of this loan should be finalized in a few weeks.

In all, we expect coverage ratio to improve marginally upon the completion of the restructuring of Aiteo's credit facility but we remain wary of Atlantic energy loan and the impact on shareholders' funds if the bank is to make full provision for this asset.

Management shifts focus to transaction banking
Management emphasised its strategy to move from lending to transaction banking at its Q3'16 conference call. The bank has also been ramping up its electronic banking transactions and has constantly won the NIBBS transaction award as it consistently processes over 100 million electronic transactions monthly on its digital banking platform.

Reflecting this development, non - interest revenues grew by 56% YoY. Over the medium term, we envisage significant growth in non - interest incomes given the bank's strong potential to grow earnings from digital banking in view of its retail network.

Group suspends up-streaming of dividends to enable bank subsidiary shore up capital
In a bid to shore up capital, dividends from the bank (the commercial banking entity) has been suspended. The capital adequacy ratio of the commercial banking entity has declined to 15.4% in 9M'16 from 17.1% in FY'15; hence management will be retaining all profit earned during the period  to boost capital.

The group however intends to pay FY'16 dividend from the profit of its other subsidiaries and guided towards paying no less than the amount paid in FY'15 (15 kobo).

Earnings Outlook
We project that top line and bottom-line will be around N586.4 billion and N39.3 billion representing a growth of 19.5% and 161% respectively. The marked growth in bottom line is due to the abnormally low base of N15.2 billion in FY'15 compared to N82.8 billion and N70.6 billion recorded in FY'14 and FY'13 respectively.

Our projections follows from our expectation that the impact of expected  revaluation gains of about N81 billion (9M'16 : N68.4 billion) will be wiped out by huge impairments which we estimate might be around N138.8 billion (9M'16 : N114.7 billion).

We expect non-performing loan ratio and cost of risk (COR) to rise to 26% (9M'15: 24.9%) and 7.1% respectively whilst ROAE and ROAA may decline to  7% and 0.9% respectively.

Valuation: We downgrade FBNH to a Hold
After adjusting for the uptrend in impairment charges in our excess return model, we revise our target price to N3.21 from N4.93. Our current target price represents 4.6% upside to its current price of N3.07.

Hence, we downgrade our  rating on the counter to a Hold. At current price, the counter is trading at a forward P/B and P/E of 0.2x and 2.7x compared to peer average of 0.6x and 3.5x respectively.

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3.      FBNH Declares N42.52 bn Profit in Q3 16 SP N3.00k

4.      FirstBank Partners Nigerian-British Chamber of Commerce to drive MSME Growth.

5.      FBN Holdings Plc Appoints Mr. Patrick Iyamabo as CFO for FirstBank of Nigeria Limited

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10.  FBNH Declares N35.9bn Profit Records 10.5 PAT decline in Q2 16 SP N3.45k

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12.  FBNH Conference Call Update - Begins Complete Overhaul of Risk Mgmt Framework

13.  FBNH - Impairment charges erode returns though not without Silver-lining

14.  FBNH Q4 15 Q1 16 Conference Call Earnings Presentation The key takeaways

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17.   FBNH Board Approves 2015 Audited Results Awaits Regulatory Approval

18.  FBN Holdings Plc Extends Closed Period to April 5 2016 Postpones Board Meeting

19.  FBN Holdings Plc Holds Board Meeting on 22nd March 2016 To Observe Closed Period

20. FBN Holdings Plc Issues Profit Warning for Year Ended 31 December 2015-

21.  FBN Holding Plc records 13.53% decline in PAT as Gross Earnings up by 17.46 in Q3 15

22. FBNH declares N40.1 billion PAT in Q2 15 result SP N7.80k

23. FBNH declares N22.6billion PAT in Q1 15 result SP N10.50k

24. FBNH Proposes 10kobo dividend 1 for 10 Bonus in 2014 Audited result 

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