FBN Holdings PLC: Weaker Q4 Drives FY’17 Earnings Miss; BUY with TP Of N15:88


Thursday, April 26, 2018  10.18AM / Vetiva Research 

• High yield environment in FY’17 supports Interest Income
• PAT up 179% y/y despite mild top line growth
• Flat balance sheet performance may cap earnings going forward
Asset quality improves – loan loss down 33% y/y

Earnings lag estimates – Gross Earnings up 2% y/y

FBNH released its long-awaited FY’17 results, posting mixed performance across major earnings lines. Particularly, Gross Earnings rose 2% y/y to 595 billion - ahead of our 581 billion estimate. 

The mild top line growth was supported by a 16% y/y rise in Interest Income to 470 billion (Vetiva: 478 billion) amidst a notable 32% y/y moderation in Non-Interest Income to 113 billion – following the continued normalization of Foreign Exchange Gains. 

Despite the relatively flat Customer Deposit for the year, Interest Expense was up 37% y/y and 9% q/q to 138 billion – 2% higher than our 135 billion estimate. With this, Net-Interest Income rose 9% y/y to 332 billion, 3% weaker than our estimate, following a 14% q/q contraction. 

However, weak asset quality continues to drag earnings. Although loan loss provision moderated 33% y/y to 150 billion, the expense line came in much higher than our 135 billion – following a significant 50% q/q rise in loan losses in Q4’17. 

According to management, the last quarter rise was largely driven by additional provisions taken on its 9mobile exposure. 

Consequently, whilst Operating Income rose 21% to 294 billion, the income line came in 18% weaker q/q and 5% below Vetiva’s estimate. Furthermore, Operating Expense rose 8% y/y to 238 billion (up 7% q/q) – higher than our 234 billion estimate, thus bringing PBT to 57 billion (FY’16: 23 billion). With the lower effective tax rate of 16% (FY’16: 25%), PAT rose 179% y/y to 48 billion (thanks to the lower base from prior year) - missing our 61 billion estimate. 

In addition, FBNH reported 7.7 billion loss from discontinued operations, bringing bottom line to 40.0 billion. Overall, the Board of Directors proposed a dividend of 0.25 per share for FY’17 vs. our expected 0.30 and prior year’s 0.10. 

TP revised to N15.88 (Previous: N14.22)
We have revised our estimates across most line items to reflect the earnings miss. 

Particularly, whilst we expect improving risk environment to support credit growth in 2018, we cut our loan growth forecast to flat (Previous: 10%) – pressured by the expected loan write-off following the implementation of IFRS 9, a trend we have observed across all the banks that have released Q1’18 results so far.

We estimate a mild 3% y/y growth in Gross Earnings to 610 billion – supported by our 15% y/y growth forecast for Non-Interest Income (130 billion) amidst a flat Interest Income expectation (481 billion). 

Importantly, we cut our loan loss provision expectation to 44.3 billion as we expect the bank to take a one-time charge against equity in Q1’18 (in line with IFRS 9 treatment). With our 5% y/y Operating Expense growth expectation, we anticipate a 100bps moderation in Cost to Income ratio to 53% for FY’18. 

Overall, we forecast a significant rise in PAT to 149 billion for FY’18 – translating to an EPS of 4.16. We revise our Target Price (TP) to 15.88 (Previous: 14.22) – FBNH trades at FY’18 P/B and P/E ratios of 0.7x and 2.7x vs. Tier I averages of 1.0x and 4.7x respectively. 

Proshare Nigeria Pvt. Ltd.

For further details, contact  Vetiva’s Olalekan Olabode, CFA*  o.olabode@vetiva.com  

Proshare Nigeria Pvt. Ltd.

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