Wednesday, August 09, 2017
8:00AM / Proshare Research / @TheAnalystNG
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FBN-Holdings’ (FBNH) rich history and the critical role it has played in both financial inclusion and intermediation precipitated the need for a performance assessment report. Moreover, the present blurred lines created by the Group’s financial performance reinforced the need to critically analyse its numbers for the financial year 2016.
An Economic and Sectoral Overview
Nigeria in 2016 slipped into recession, largely as a result of reduced oil prices, oil production and foreign exchange earnings. The business community was however able to stimulate the economy, though at a slow pace. Following the contractionary monetary policy stance of the Central bank, the economy witnessed increase in interest rates and an introduction of a flexible exchange rate regime while inflationary pressures mounted.
The various macroeconomic challenges faced in this period weakened the stability of financial system. This combined with the dampened appetite for risky assets and the large exposure to the oil and gas sector put considerable stress on the banking system, as banks were forced to cut down on their operating expenses. In a bid contain the risks to financial stability; banking supervision tightened and dividend payments & bonuses was prohibited for banks with high level of non-performing loans.
FBNH stable through the tides
FBNH is second largest in terms of book value, customer deposits, total income and third largest in terms of loans & advances, branches network, employee base in Nigeria. However, primarily due to weak loan book and lower profitability, FBNH is currently positioned a bit lower in the overall banking sector.
Our analysis showed that the market position was largely retained given FBNH’s deep customer deposit of N3.093trillion and a book value of N602billion. The amount of N2.063trillion in loans and advances justifies the inclusion of FirstBank among the tier 1 banks. Evidently, most of the banks risk parameters have tilted upwards which was reflective after the 2016 financial horizon. The Bank’s capital adequacy ratio remained stabilised at 17.8%. It remained the bank with lowest capital adequacy ratio among the Tier 1 banks. Regardless, it is relatively higher than the banking sector’s common equalization of 13.1% and higher than most tier 2 banks.
The jolt in FBNH’s long term borrowing partly due to devaluation when compared to a tepid increase in equity triggered an outward cave in its gearing ratio. The report thus admits that the capacity to hewn revenue as a growth tool by the Holdco is not in doubt given the fact that it declared the highest pre-provision operating profit in the sector.
FBNH’s consistent strong yield on its interest earning asset has contributed to its rate of revenue accretion and do share a positive correlation with its net interest margin. Post mortem carried out during our analysis further showed a crippling in FBNH’s operating profit steaming from the increase in the bank’s non-performing loans (NPLs), as the NPLs of the bank rose to 24.4% as at year end 2016. The crippling in operating profit margin from 19.4% (2014) to 3.9% (2016) portrays the weight of credit losses on the Group’s revenue at the end of 2016.
FBN’s 42.2% loan concentration in the oil sector made its loan portfolio have a relatively thin deviation while it appears more rent focused. The causation of a negative anti-clockwise movement in oil price on the quality of its asset was inevitable. This placed FBN as the bank with the highest quantum of non-performing loans among tier 1 banks. Thus, the fallout has been a relatively weak loan yield, erosion in asset quality and an escalation in risk. The presence of high cost of risk and the loan to deposit ratio of 77.1% has reduced FBN’s headroom for counter cyclical lending. Although loan impairment is a concern, FBN still tempered down cost to income ratio in a cycle of rising inflation.
FBNH’s financial performance in Q1 2017 recorded a growth in operating profit from 3.9% to 14%. The healthier performance is as a result of improved macro activity and a more aggressive approach towards loan recovery.
Finally, the report highlighted that the cost to income ratio and cost to deposit are on the up rise while it also carried out a recall on the macro environment and a comparative analysis of the banking sector.
While we understand that Financial Institutions are not immune to global and domestic economy shocks, as this tend to affect both the ability to operate as well as the asset quality of banks; we believe FBNH can do more by:
· Improving its Capital Adequacy (both Tier 1 and Overall)
· Focusing more on Non-interest Income than Interest Income in 2017
· Improving Asset Quality and Avoid High Specific Sector Concentration
· Rationalizing Operating Costs and
· Leveraging Technology More to Manage its Operations
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Updated on September 15, 2017
1. FBN Holdings Plc H1 2017 Conference Call & Earnings Presentation - The Key Takeaways
2. FBN Holdings Plc H1’17 Results – Weak Underlying Earnings Compound Outlook
3. FBN Holdings: Basking In The Realm of High NIMs
4. FBNH H1-2017 Results - FX Gains Vanish, Impairments Still High as Profit Drops
5. FBN Holdings Plc Q2 2017 Results - Net Interest Income Up by +2.7% QoQ
6. FBN Holdings Plc H1'17 - Mixed Performances Amidst Impressive Top Line Growth
7. FBNH Declares N29.5bn PAT in Q2 2017 Results,(SP:N5.97k)
8. Is FBNH a good buy?
9. First Bank Introduces Salary Overdraft Facility
10. 5 Things to Take Away from FBNH's Recent Results
11. FBNH Releases Q4'16 and Q1'17 Results; Declares N16.1 bn Profit in Q1,(SP:N3.50k)
12. Convenience is the key word with FirstBank's FirstMobile
13. Short-Term Ratings on Five Nigerian Banks Raised to 'B' On Criteria Revision
14. FBNH Plc Notifies of Closed Period and Board's Approval of 2016 Audited Financial Statements
15. FBN Holdings Plc Extends Filing Date of 2016 Audited Financial Statements
16. Is FBNH the Rick Grimes of Nigeria?
17. Asset Quality Challenges Continue to Bite FBN Holdings Earnings, retain BUY
18. FBNH Declares N42.52 bn Profit in Q3 16 SP N3.00k
19. FirstBank Partners Nigerian-British Chamber of Commerce to drive MSME Growth.
20. FBN Holdings Plc Appoints Mr. Patrick Iyamabo as CFO for FirstBank of Nigeria Limited
21. Appointments within the FBN Holdings Group
22. FBN Holdings Plc Strong FX Gain Tapers Impact of Impairment Loss
23. Devaluation Serves as Earnings Outperformance Catalyst for FBN Holdings Plc in H1 2016
24. FBN Holdings Plc: Strong FX Gain Tapers Impact of Impairment Loss
25. FBNH Declares N35.9bn Profit Records 10.5 PAT decline in Q2 16 SP N3.45k
26. FBNH Issues Notification of Invitation of FirstBank ED by the EFCC
27. FBNH Conference Call Update - Begins Complete Overhaul of Risk Mgmt Framework
28. FBNH - Impairment charges erode returns though not without Silver-lining
29. FBNH Q4 15 Q1 16 Conference Call Earnings Presentation The key takeaways
30. FBNH FY 15 Q1 16 results - House cleaning as earnings plunge NPL ratio at a 10 year high
31. FBNH Releases Q4 15 and Q1 16 Results Records 82 PAT decline in Q4 SP N3.31k
32. FBNH Board Approves 2015 Audited Results Awaits Regulatory Approval
33. FBN Holdings Plc Extends Closed Period to April 5 2016 Postpones Board Meeting
34. FBN Holdings Plc Holds Board Meeting on 22nd March 2016 To Observe Closed Period
35. FBN Holdings Plc Issues Profit Warning for Year Ended 31 December 2015-
36. FBN Holding Plc records 13.53% decline in PAT as Gross Earnings up by 17.46 in Q3 15
37. FBNH declares N40.1 billion PAT in Q2 15 result SP N7.80k
38. FBNH declares N22.6billion PAT in Q1 15 result SP N10.50k