Friday, July 28, 2017 10:45 AM / Vetiva Research
· Strong interest income – supported by high interest rates
· Loan loss pressure persists despite moderating NPL ratio 22% (Q1’17: 26%)
· H1’17 run rate on track to beat weak FY’16
Conservative tax rate lifts PAT, PBT in line with estimate
FBNH released its H1’17 results reporting mixed performances across key line items. Whilst Non-Interest Income moderated 46% y/y – largely due to the high base from last year (following significant FX revaluation gains reported post-currency devaluation – H1’16: ₦53 billion vs. H1’17: ₦5 billion), Interest Income grew 37% y/y to ₦232 billion – supported by the strong interest rate environment despite flat loan growth.
Consequently, Gross Earnings (₦289 billion) rose 8% y/y, beating our ₦264 billion estimate. The Nigerian businesses continue to account for a significant portion of the Group’s earnings – 95% of Gross Earnings vs. H1’16: 90%.
Although Interest Expense at ₦68 billion came in higher than our ₦63 billion forecast and up 2% q/q, we highlight that margins expanded, with the Group recording a Net Interest Margin (NIM) of 8.5% in H1’17 vs. Q1’16: 8.2%.
Whilst loan loss expense moderated 11% y/y, the provision line was 12% higher than our estimate having risen 17% q/q. We however highlight the notable moderation in NPL ratio, down to 22% from the 26% recorded in Q1’17. Having said that, we note that asset quality challenge remains the key pressure point for earnings.
Furthermore, following higher cost pressure in Q2’17, Operating Expense rose 12% y/y to ₦117 billion – deviating from recent cost containment trend and 6% higher than our estimate. Whilst PBT declined 22% y/y, the profit line was just in line with our ₦36 billion forecast.
However, with an effective tax rate of 17% vs. our 25% forecast, PAT came in at ₦29.5 billion – 10% better than our ₦26.7 billion, albeit down 18% y/y.
TP revised to N7.75 (Previous: N6.55)
Our estimates have been revised marginally to reflect the deviations in top line, OPEX, and loan loss provision. Whilst we cut our FY’17 loan expectation to a flat growth (Previous: 4%), we raise our Gross Earnings forecast to ₦569 billion (Previous: ₦528 billion) – supported by the high interest rate environment.
Despite the moderation in NPL ratio, we raise our loan loss provision marginally to reflect the miss. Also, we revise our OPEX higher due to the cost pressure observed in Q2’17.
Despite lagging y/y at the end of H1’17, our FY’17 PAT forecast (₦53.5 billion) is a huge rise from prior year’s ₦17.1 billion amidst much lower loan loss expenses.
Overall, we revise our Target Price (TP) to ₦7.75 (Previous: ₦6.55). FBNH trades at FY’17 P/B and P/E ratios of 0.3x and 4.0x vs. Tier I averages of 1.1x and 6.0x respectively.
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