Monday, July 30, 2018/01.30PM / ARM Research
FBN Holdings Plc (FBNH) half-year results was near expectation with EPS of N0.93 (+14% YoY) on the back of sizable decline in loan-loss provision and strong growth in non-interest revenue (NIR). Precisely, reflecting lower NPL ratio of 20.8% (H1 17: 22%), loan-loss provision was down 15% YoY to N52.8 billion with annualized Cost of Risk at 4.7%. In terms of NIR, the bank reported foreign exchange gains of N12.9 billion (+158% YoY), which alongside healthy net fee income of N35 billion (+14% YoY) supported the 22% YoY growth in NIR to N61.3 billion.
In terms of drags, funding cost pressure was evident in the period with interest expense expanding 11% YoY to N75.8 billion. Consequently, funding cost (WACF) was 6bps higher to 3.5%, which combined with lower asset yields (-75bps YoY to 13.1%), drove a contraction (-108bps YoY) in net interest margin (NIM) to 8.7%.
Contraction in loan book negates management’s guidance.
Similar to Q1 18 wherein the bank’s loan book was down 5% QoQ, net loans declined 3% QoQ in H1 18 (-7% YTD). This implies that loan book will have to grow by >20% to meet management’s guidance of 7-10%, which is unlikely, as we are of the view that the bank will be more cautious on risk asset creation, and thus expect the bank to revise downwards its loan growth target. However, our FY 18E loan book decline of 2% YoY seems more in line, though we will await revision from management.
QoQ increase in loan-loss provision but run-rate shows recovery.
At N27.5 billion, loan-loss provision was 8.4% higher QoQ with Cost of Risk printing at 4.0% (Q1 18: 3.6%). In our view, higher provisioning was guided by a more prudent approach based on healthy earnings in the period, given that NPL ratio improved to 20.8% from 21.5% in Q1 2018. To add, on annualized basis, loan-loss provision of N105.6 billion is lower than our expectation of N117.2 billion for FY 18E, reiterating our expected recovery in earnings. To add, FBNH’s coverage ratio (incl. regulatory reserve) improved significantly to hit the highest level in 18 quarters at 73.1% (Q1 18: 59.0%, FY 17: 53.7%).
Foreign exchange gains boost NIR
In Q2 18, NIR improved by 47.6% QoQ to N36.5 billion as net gains on foreign exchange grew by 80% QoQ to N8.3 billion. Likewise, net fee income grew by 19% QoQ due to strong growth in credit related fees (+42% QoQ), E-banking fee (+72% QoQ), and commission on bonds (+125% QoQ). Furthermore, the merchant banking business boosted the growth in NIR with financial advisory and fund management fees expanding by 42% and 582% QoQ respectively.
Interest on Borrowings drive funding cost higher
Interest expense expanded 15.5% QoQ to N40.6 billion mirroring a 127% QoQ increase in interest on borrowings to N8.3 billion. In terms of drivers, we are of the view that the depreciation in NIFEX to ~ N350/$ (from N330/$ in Q1 18) largely drove the increase in interest expense on borrowing, particularly the Eurobond. Consequently, funding cost (WACF) expanded by 48bps QoQ to 3.7%. However, reflecting higher asset yields (+61bps QoQ to 13.3%)—an offshoot on higher interest income from loans to banks (+577% QoQ to N9.0 billion)— NIM was 13bps higher to 8.8%. CASA as a share of total deposit increased to 72% (Q1 18: 68%).
Exercising call option to redeem the Eurobond notes I.
First Bank notified its intention to exercise its call option on its $300 million notes of 8.25% due on August 2020. The bank has given notice to call the notes on the call date of August 07, 2018. We will be seeking clarity from management on the impact on funding, FCY position and possible capital raise.
Overall, FBNH’s ROE expanded by 253bps QoQ to 11.4% (H1 18: 10.1%, FY 18E: 9.1%) on account of lower loan-loss provisioning and strong NIR with Q2 18 EPS at N0.52 (27% QoQ, 41% YoY). Capital adequacy ratio of 18.1% and liquidity ratio of 55% is comfortably above regulatory limit and in line with our FY18 estimates.
The stock currently trades at a current P/B of 0.54x which is at a 40% discount to peers of 0.9x. Our last communicated FVE on FBNH is N14.40 which translates to a STRONG BUY rating on the stock.
We will revisit our numbers after further discussion with management.
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