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FBNH - Unconvincing Start To The Year As Earnings Miss Estimates; TP Revised to N12.82 (N15.88)

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Tuesday, May 01, 2018  05:55 PM / Vetiva Research 

Highlights of Vetiva Analyst Report
• Earnings lag estimates – PAT down 9% y/y
• Higher than expected loan loss provisioning drags bottom line
• Lower than expected one-time charge from IFRS 9 implementation 
• 
Loan loss provision revised higher to reflect Q1’18 run rate

Earnings Lag Estimates – PAT Down 9% y/y
FBNH released its Q1’18 results, posting weaker than expected performances across most line items. Particularly, Gross Earnings moderated 2% y/y to 139 billion – weaker than prior quarter’s 154 billion and our 153 billion estimate. The unconvincing top line performance was driven by weaker than expected performances from both Interest and Non-Interest Income lines.

Whilst Non-Interest Income rose by a marginal 1% to
23.6 billion, the income line was 27% and 40% lower than our 32.4 billion estimate and prior quarter’s 39.5 billion. Also, Interest Income moderated 3% y/y and 2% q/q to 111 billion – missing our 120 billion estimate. With Interest Expense coming largely in line with our estimate at 35.2 billion, Net Interest Income was down 6% y/y to 75.7 billion (below our 85.5 billion estimate).

In line with the trend observed across most banks in Q1’18, we had expected the implementation of IFRS 9 to result in a significant one-time write off from earnings at the beginning of Q1’18 and a more tempered loan loss provision for the period. However, the initial application of IFRS 9 resulted in a more contained charge of
36.1 billion vs. the average 95.5 billion recorded by other tier 1 banks.

Consequently, FBNH reported a loan loss provision of
25.3 billion vs. our 11.1 billion estimate. With this, Operating Income came in flat y/y at 74 billion – albeit significantly weaker than our 107 billion estimate. Furthermore, with Operating Expense coming in at 55.2 billion - better than our 64.9 billion estimate, PBT was down 6% y/y to 18.8 billion – significantly missing our 41.9 billion estimate. Overall, PAT was down 9% y/y to 14.8 billion – behind our
35.2 billion estimate.

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TP Revised to N12.82 (Previous: N15.88)
We have revised our estimates across most line items to reflect the earnings miss. Most notably, we raise our loan loss provision to 121 billion (Previous: 44.3 billion) following Q1’18 trend and in line with management guided cost of risk of 6.0%. Also, with the one-time write-off coming in lower than we had expected, we raise our loan growth forecast marginally higher to 3% (Previous: 0%). 

Despite this, we cut our Interest Income estimate to
449 billion (Previous: 481 billion) following weaker than expected Q1’18 run rate. Similarly, we revise our Non-Interest Income estimate lower to 110 billion (Previous: 130 billion). 

Hence, we revise our Gross Earnings estimate to
550 billion (Previous: 610 billion). With Operating Expense coming in 15% better than we had estimated for Q1’17, we lower our Operating Expense estimate to 218 billion (Previous: 250 billion) – translating to a cost to income ratio of 53%. Overall, we revise our PAT estimate lower to 58.3 billion for FY’18 – translating to an EPS of 1.62. 

Consequently, our Target Price (TP) is revised lower to
12.82 (Previous: 15.88) – FBNH trades at FY’18 P/B and P/E ratios of 0.6x and 7.7x vs. Tier I averages of 1.0x and 4.7x respectively.
  

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About Analyst/Author
Olalekan Olabode  o.olabode@vetiva.com 

Proshare Nigeria Pvt. Ltd.

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