Friday, August 17, 2018 /3:55PM/Cordros Capital
We resume coverage of FBNH holdings plc and update our model, following H1-18 result. The H1-18 result was impressive, with EPS growth of 13.68% to NGN0.93, against NGN0.82 in similar period last year. Interest income, as with peers (ZENITHBANK: -12.81% and GUARANTY: -2.41%), was down 3.0% in the half year period. But following an impressive NIR (+23.25% y/y), gross earnings grew by 1.63% y/y. A lower provision for loan loss impairment (-15.38% y/y) also gave earnings a boost.
Still-negative NII for 2018E, despite expected marginal improvement in asset yield and CoF in H2
We forecast NII to decline by 2.95% in 2018E, as we expect interest income to drop by 0.17% and interest expense to increase by 6.52%, vs. FY-2017. While we expect improvement in interest income in H2, relative to H1 – on the back of higher interest rate as well as a moderate growth in the loan book – it is unlikely to result to higher interest income in 2018E, vs 2017 FY. We forecast asset yield of 11% in 2018E, 37 bps higher than H1-2018 (10.62%), but 101 bps lower than FY-17. Overall, we expect only a marginal improvement in the yields on both investment securities and bank and customer loans in H2-2018, from H1-2018.
Meanwhile, from 3.56% in H1-18, we expect cost of funds to moderate to 3.32% in 2018E, as we look to improved cost of borrowings (following the recent prepayment of the USD300 million Eurobond) and customer deposits. However, this remains above 3.27% recorded in FY-17, following higher costs of FCY borrowings (following higher interest rates in the international markets) as well as some local customer deposits. Overall, 2018E NIM is estimated at 7.54%, against 8.48% in FY-2017.
NIR growth expected to continue
The increase in e-banking fees (40.8% y/y) was a major contributor to the growth in fee & commission income (13% y/y) in H1-18. This was attributable to growth recorded across the bank’s digital platforms. As at H1-2018, total value of transactions on the USSD banking platform had grown by 187.66%, mobile banking by 100.5%, and agency banking by 545.82%, all on year-on-year basis. The contribution of e-business to NIR also improved to 24.3% during the half year, against 22.0% in FY-2017.
We believe this is likely to improve going forward, in line with management’s guidance to a 40% contribution to NIR in 2018E. Thus, we forecast a 21.6% growth in net fee and commission income in 2018E. Together with expected improvements in net insurance premium, as well as gains on investment securities, forex income, and dividend income, we forecast NIR growth of 19.4% in 2018E.
Growth in loan book expected to close 2018E negative
Management revised downward its guidance for net loan growth in 2018E to 5%-7% (previously 7%-10%) and reiterated that priority will be given to the manufacturing, trade, and retail segments. However, we remain conservative in our forecast and estimate 2.42% decline in net loans in 2018E. The contraction in the loan book by 7.15% in H1, means loan book would have to grow by 13-15% to meet the management’s reviewed guidance --we consider this unlikely. Meanwhile, management has attributed the negative loan growth in H1-18 to pay-offs made on some loans, as well as delays in the processing and documentation of new loans.
Asset quality still a concern
On asset quality, we forecast cost of risk of 5.9% – in line with management’s guidance of 6%-7% -- owing to the pending resolution of some of the bank’s big NPLs (especially Atlantic Energy and 9mobile), as well as IFRS 9 requirement of increased provisions on expected new loans. Our forecast is higher than the annualized CoR of 4.8% recorded in H1-18, but lower than the 6.4% in FY-17.
This, coupled with our expected 4% growth in gross loans, brings our estimated loan loss provision to NGN137.93 billion in FY-18E, 8.30% lower vs. FY-17. Meanwhile, considering the delays in the politically-sensitive exposure to Atlantic Energy (AE) (6% of the loan book), as well as the lingering uncertainty around the 9mobile sale deal, we estimate NPL ratio of 18% in 2018E (FY-17: 22.8%; H1-18: 20.8%), against the bank’s guidance of less than 15%. It is worth stating that excluding the AE exposure, NPL ratio, according to management, should be in a single digit region. Further on the bank’s loan assets, the delay vis-a-vis realization of Ontario assets sale is also a concern, as management is yet to achieve the expected realization of NGN20 billion from the asset sale.
Neutral impact of prepaid USD300 million Eurobond
The recent prepayment of the called USD300 million Eurobond, according to management, would have neutral impact on the bank’s FCY net long position. The prepayment is also not expected to impact capital adequacy, as tier two capital remains at comfortable levels.
Estimate and valuation
Overall, we forecast 2018E and 2019E EPS to grow by 27.59% y/y and 20.89% y/y to NGN1.70 and NGN2.05, respectively. Based on updates to our model, we have TP of NGN12.38 for FBNH, translating to an upside potential of 26.28%, with BUY rating. On our estimates, FBNH trades at forward P/E and P/BV multiples of 7.2x and 0.60x, below Bloomberg’s Middle East Africa peer median multiples of 10.5x and 1.7x respectively.
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