Thursday, April 9, 2015 9:22PM / United Capital Research
• 21.3% growth in Gross earnings to N480.6bn largely driven by robust growth in non-interest income (up 66.1% to N111.8bn)
• Elevated cost profile clogged PBT growth as Interest expense and OPEX rose by 27.0% and 27.4% to N118.7bn and N236.8bn respectively.
• We are slightly uncomfortable with the deteriorating asset quality and rising impairment charge.
• We retain our BUY rating for the counter with a slight revision in our TP.
Top line growth underpinned by a strong Q4 performance
FBNH reported a 21.3% growth in top line to N480.6bn driven by a 12.0% growth in interest income to N362.6bn and a 66.1% growth in non-interest income to N111.9bn. A closer look shows that the growth in gross earnings was propelled by a strong performance in Q4’14 as top line for the quarter was up by 23.2% q/q to N147.2bn, with interest income growing by 18.0% to N106.9bn while non-interest income expanded by 40% to N40.3bn. Income from investment securities contributed c.57% to interest income in the quarter. The strong performance recorded in Q4’14 was driven by a higher yield environment in addition to gains from FX on the back of exchange rate volatility. However, for FY’14, funding income rose by 14.1% to N251.2bn while income from Investment securities rose by 6.9% to N92.2bn.
Given our outlook for lower yields and reduced FX volatility in 2015, we believe a strong top line growth for FY‘15 would be driven by a considerable expansion in loan book, even as the bank’s Loan-to-Deposit ratio of 60.4% provides ample headroom for modest risk asset growth albeit within the limits of existing or planned capital buffers.
Elevated cost buoyed by borrowings and rising OPEX
FBNH’s Cost-to-Income ratio rose to 66.6% (Vs 62.5% in FY’13). Rising cost pressure took a toll on the bank’s PBT which grew marginally by 1.7% to N92.9bn, thanks to a 51.5% drop in effective tax to N10.bn (N20.7bn –
FY’13), which helped to support PAT growth of 17.3% to N82.8bn. Cost pressure was underpinned by a 27.0% and 27.4% rise in interest expense and OPEX to N118.7bn and N236.8bn respectively. The growth in interest expense was due to higher borrowing expense indicating a full year impact of the US$450mn Eurobond issued last year as interest expense from borrowing advanced significantly by 58.1% to N17.9bn. Also, the bank’s deposit rampup on the back of tightening monetary stance drove interest expense on deposit up by 23.3% to N98.0bn.
The bank’s costs were also pressured by a 21.3% growth in personnel expenses and a 32.2% growth in other OPEX resulted in a 27.4% growth in total OPEX to N236.8bn. The rise in OPEX was largely attributed to the bank’s full year consolidated of newly acquired entities (i.e ICB West Africa, Oasis Insurance and Kakawa Discount house). This was supported by higher regulatory cost from AMCON and NDIC charge. We think the bank will need to garner more efficiency to moderate cost as underlying pressure on OPEX remains visible, constituting a downside risk to earnings in FY’15 earnings.
Strong loan growth amidst lower asset quality
FBNH’s loan book grew by 20.0% to N2.6trn (Vs. N2.2trn – FY’13), pushing cost of risks up by 10bps to 1.0% from 0.9% in FY’13. Impairment charge rose by 27.7% to N25.9bn on the back of the bank’s sizeable exposure to the oil and gas and SMEs segments. We are slightly uncomfortable with the deteriorating asset quality of the bank. We will seek further clarification on this from management.
BUY rating maintained with revision to TP
We think the rise in CAR to 16.7% will allow for modest growth in loans for FY’15, we therefore forecast a 15.0% growth in loans and advances for FY’15. We expect interest expense to grow by 40.0% for FY’15 as we see the bank ramping up on deposit. However, we believe elevated cost pressure and moderated income from FX and Investment securities will take a toll on bottom line in FY’15.
We have revised our model and reviewed our TP upward to N13.96. FBNH currently trades at a trailing P/E and P/BV of 3.72x and 0.54x compared to tier one average of 4.0x and 1.2x. FBNH shares are currently outperforming the All Share Index with YTD return of 8.0%.
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