Friday, July 28, 2017 5:35 PM / Elixir Research
NSE First Bank of Nigeria Holding Company (FBNH) Plc recently released its H1- 2017 earnings which showed impairments remain a major issue as the bank booked even more specific charges.
In addition, the negative base effect of the Naira devaluation last June hit earnings as expected and will remain a headwind through the second half.
There were no major changes to our balance sheet and earnings forecasts although we did trim deposit and loan book growth projections following the shrinkage of these portfolios as at H1.
Impairments on an annualised basis is still in and around our initial FY-2017 forecast of ₦103 billion which was upped slightly to ₦109 billion—we expect the run rate of impairments charges to slowdown off the back of improving macros, and cost of risk should drop to 5% by year-end.
That said, impairments remain the biggest downside risk to our FY-2017 bottom line earnings forecasts as visibility on the quality of the loan book remains opaque. Despite concerns around impairment shocks we raised the 12-month target price from ₦7.07 to ₦7.87 but this largely reflects the impact of the general rally in peers which lifted the average PE ratio of the comparison universe.
The downside risk tied to impairments could see the stock struggle to hit this price and this has been quite evident from the stalled rally in the stock even as peers hit multi-year highs.
Net interest income jumped 30% y/y to ₦164.10 billion boosted by a 237bps y/y absolute rise in yield on asset to 11.96% as the bank reallocated capital to high yielding investment securities—portfolio grew by 28.32% y/y and 12% in H1, and interest income from this book almost doubled to ₦81.60 billion.
The CBN’s tight money policy has seen T-Bill and bond yields remain elevated and this has lured banks into allocating more capital to FGN debt securities at the expense of organic loan growth.
Tight money also negatively impacted borrowing cost which rose by 111bps y/y in absolute terms to 3.51%. Non-interest income plunged 46% y/y to ₦50.66 billion as FX revaluation gains which boosted earnings a year ago following the June 20, 2016 Naira float weighed on performance this time around—FX revaluation gains dropped 91% y/y to just ₦5 billion (from ₦53 billion a year ago).
Fees and commission income growth has stalled but should pick up in H2 as the economy recovers. Although impairments declined by 11% y/y, at ₦62.41 billion the headline number remains elevated.
As has been the case over the last two and a half years, specific impairments were the major source of the problem and this point to major corporate governance and risk management failures—specific impairments stood at ₦64.79 billion, down from ₦71.27 billion a year ago. Profit-after-tax dropped 18% y/y to ₦29.50 billion