Wednesday, July 27, 2016 9.15AM / InvestmentOne Research
Q2 2016 results highlight:
· Net interest income down: -2.7% q/q; -15.0% y/y
· Other operating income up: +231.7% q/q; +125.5% y/y
· Mixed PBT: +8.1% q/q; -5.2% y/y
FBNH’s recently released results Q2 2016 were reflective of the depreciation of the local currency at the interbank market. This contributed to the significant spike in net gains on FX to N51.5bn in Q2 2016 against N1.4bn in Q1 2016.
However, it also lead to the spike in loan impairment charges which increased by N44.4bn q/q to N57.1bn. While we expected loan impairment charges to increase following Q1 2016 results, which showed non-performing loan coverage of just c.37% compared to over 100% amongst its competitors, the rise in impairment charges was N33.9bn more than we forecasted.
We highlight that the bank has now taken N69.9bn in loan impairment charges so far this year, following the N119bn recorded in 2015, which was the highest of all the banks under our coverage. This said, asset quality still remains a concern as the NPL ratio remained above the 5% regulatory threshold at 22.8%, up from 21.5% in Q1 2016.
With this said, the gain on FX accounted for 72% of other operating income in Q2 2016 compared to 6% in Q1 2016. Consequently, other operating income increased by c.N50bn q/q to N71.4bn pushing PBT up +8.1% q/q despite the surge loan impairment charges; the -2.7% q/q decline in net interest income and the +3.9 q/q rise in opex.
On a y/y basis, PBT was down -5.2% following a N38.7bn y/y increase in loan impairment charges and a 15% y/y slide in net interest income which more than offset the N39.7bn y/y increase in other operating income and the -14% y/y decrease in opex. The spike in other operating income was largely driven by the N44.3bn y/y surge in net gains on FX.
Although we feel the recent 200bps increase in MPR may be supportive of company earnings going forward, we remain concerned that asset quality may continue to hinder company performance.
While our models are under review, we rate FBNH (HOLD). Our price target is N4.40.
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