FBN Holdings Plc: Strong FX Gain Tapers Impact of Impairment Loss

Proshare

Wednesday, July 27, 2016 11.00AM / Vetiva Research

·         PAT down 10% y/y, albeit 26% ahead of our estimate

·         Cost contained, Interest Expense and efficiency improves significantly

·         NPL rise persists, hits historic high 22.8%; CAR: 15.8%

·         Loan portfolio rises 16%, supported by currency depreciation


PAT down 10% y/y albeit ahead of consensus
FBNH’s H1’16 results showed mixed performances across key line items. Amidst an overall weaker Q2 performance, Gross Earnings rose 49% q/q to ensure a flat H1 topline performance; 26% ahead of our estimate.

The impressive top line performance was spurred by a significant rise in Non-Interest Income – largely due to a N52.9 billion net gain on foreign exchange, up from the N16.9 billion recorded in the preceding year.

Whilst we note the 16% ytd growth in loan portfolio, we highlight that the growth was largely driven by the impact of the 42% FX devaluation on FCY loans (following introduction of flexible FX policy on June 16).

Consequently, Interest Income was constrained to a mild rise 3% q/q - supported by an average 250bps rise in fixed income yield across the quarter. Whilst Interest Expense moderated 41% y/y (12% better than our estimate), the expense line was up 20% q/q – pressured by the relatively tighter liquidity environment (average Call rate – Q2’16: 8.9% vs. Q1’16: 4.0%).

With consistent double whammy impact of weak oil prices and currency devaluation on loan performance (NPL at 22.8% vs. CBN benchmark of 5%), FBNH reported an impairment charge of N69.9 billion (Q2’16 standalone: N57.2 billion) Vs. Vetiva estimate of N26.7 billion.

Despite the NPL pressure, Operating Income came in 10% ahead of our estimate, albeit down 13% y/y. However, amidst higher inflationary pressure in Q2’16, OPEX rose 6% q/q and 3% ahead of our estimate. Overall, PAT declined 10% y/y to N35.9 billion – 26% ahead of our N28.5 billion estimate

TP revised to N7.10 (Previous: N9.32)
We have updated our model and revised our forecast to reflect the persistent rise in impairment charge and the impact of devaluation within the quarter. Consequently, we raise our FY’16 loan growth forecast to 20% (largely devaluation impact).

Whilst we highlight that H1’16 performance came in stronger than our estimate, we remain worried about the persistency of these earnings given that it was largely driven by FX gains.

We remain wary of rising default with NPL ratio of 22.8% and forecast a CoR of 6.7% for FY’16 (H1’16: 6.5%). Hence, we estimate a N47.4 billion PAT for FY’16, translating to an EPS of N1.32. Overall, we revise our Target Price (TP) to N7.10 (Previous: N9.32).



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