FBN Holdings Plc Q2 2017 Results - Net Interest Income Up by +2.7% QoQ


Friday, July 28, 2017 5:29 PM / InvestmentOne Research

Q2 2017 results highlight: Loan impairment charges and opex weigh on benefits from the high yield environment

·                 Net interest income of N83.1bn, up +2.7% q/q; + 33.7% y/y

·                 Profit before tax of N15.7bn, down -21.5% q/q; -34.3% y/y

·                 Profit after tax of N13.3bn, down -17.4% q/q; -11.8% y/y

Late yesterday, FBNH released its Q2 2017 results, which showed a -21.5% q/q decline in PBT to N15.7bn. We highlight that this was c.-43% lower than our estimate largely due to loan impairment charges, which were +19.6% higher than our estimate.

The bank’s Q2 2017 performance was largely driven by the +16.5% q/q increase in loan impairment charges and the +9.4% q/q rise in opex, which more than offset the +2.7% q/q uptick in net interest income and the +14.3% q/q improvement in other operating income.

While the bank continued to benefit from the high interest rate environment, which contributed to the slight increase in net interest margin to 8.5%, from 8.2% in Q1 2017, and consequently, net interest income, the other operating income performance was mainly due to the +126.6% q/q increase in net insurance premium.

Despite the increase in loan impairment charges, we highlight that there appears to be an improvement in asset quality with non-performing loans (NPL) ratio falling to 22% as at Q2 2017, from 26% as at Q1 2017.

However NPL coverage remained low at c.52% as at Q2 2017, against other Tier 1 names such as GTB (c.230% as at Q1 2017). This may be an indication that the bank wrote off a portion of its NPLs in the quarter.

On a y/y basis, PBT was down -34.3% as the -63.5% y/y decline in other operating income and the +14.3% y/y rise in opex outweighed the +33.7% y/y spike in net interest income and the -41.2% y/y slide in loan impairment charges.

Dissecting the numbers further, we point out that the other operating income performance was mainly the result of the absence of the c.N52bn net gain on foreign exchange, which supported the bank’s performance in Q2 2016.

On the other hand, the net interest performance was largely driven by the higher interest rate environment in Q2 2017, against Q2 2016 when the monetary policy was more accommodative, while the reduction in loan impairment charges was flattered by the higher base effect of Q2 2016.

With this said, given that management guided to two major NPL exposures being reclassified as performing in H2 2017, we are unlikely to see an increase in loan impairment charges in the near term.

This combined with our belief that the CBN may maintain its tight monetary policy in H2 2017 and the increasing availability of FX in the economy, may be supportive of bottom line and ROE performance going forward.

However, despite the reclassification, we expect NPL ratio to remain sufficiently above the 5% regulatory threshold in the near term.

While our models are under review, we rate FBNH shares SELL. 

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