FBNH: Any More Charge in the Big Elephant?!!!


Monday, September 05, 2016 1:52pm / GTI Research

Investment Highlight

H1 -2016: Gross Earnings and PBT down by 14.6% and 10.5% respectively.

FBN (‘’The Company’’) released its unaudited H1 -2016 result for the period ended June, 30 2016 on 26th July 2016.

Gross earnings was down 14% to N203.91billion ($641.22M) from N238.97billion ($751.47M) YoY. The 17% and 5% decline in Interest income and fee & commission income respectively were responsible for the pressure on gross earnings in the review period.

Net interest income was down 5%, at a considerably slower pace when compared with the drop in gross earnings and PAT. This is adduced to the steeper 41% reduction in interest expenses.

Operating income was down by 3% and as seen with interest expense, operating expenses was down at a much faster pace of 14.7%. Cost to income (Operating cost/operating expense) ratio consequently improved to 59.1% from 67% YoY.

However, despite the improvement in cost management in the review period, the effect of the depreciation in gross earnings was translated to a contraction in PBT which fell by 11.9% to N45.88billion ($144.23M) from N52.08billion ($163.79M). PAT also fell by 10.5% to N35.85billion ($112.75M) from N40.06billion ($125.98M) and the slightly slower depreciation rate between PBT & PAT is adduced to the lesser effective tax provision YoY.

Q1 -2016 VS Q2 -2016
On a quarter on quarter analysis, interest income recorded a paltry 2.74% rise in Q2-2016 to N85.74billion ($269.63M) from N83.45billion ($262.44M) in Q1 -2016.

The bank was clearly risk averse with weak appetite for risk asset creation in Q2 as loans to customers (which has higher margins but riskier) rose by 19.8% while the safer inter-bank placements widened by 85% between Q1 and Q2

Interest expense expanded by 20% to N23.57billion ($74.11M) from N19.58billion ($61.58M) in Q1 -2016. We adduce the spike in interest expense in Q2-2016 to the marked 9% expansion in total deposit from customers between Q1 and Q2, compared with the 4% depreciation in deposit from customers between December 2015 and March 2016.

The bank was aggressive with deposit mobilization in Q2 compared with Q1 and the spike in cost of borrowing may be adduced to the higher portion of the its total deposit skewed to term loans and savings account deposits which carry interest costs .

In Dec 2015, savings account deposit as a percentage of total deposit from customers was 24%, while term deposits was 34% of total deposit from customers also in the same period.

PBT was up by 8.09% to N23.83billion ($74.95M) from N22.05billion ($69.34M) in Q1 -2016. Net income depreciated by 27% to N15.13billion ($47.58M) from N20.72billion ($65.17M) in Q1 -2016 as a result of the higher tax provision in Q2 (ETR was 6.01% in Q1 & 36.51% in Q2).

Margin Play

The lender reported positive YoY margin movements with Net interest income margin improving to 74.50% from 64.48% while pre-tax profit margin rose to 22.50% from 21.80% YoY. Net income margin firmed up to 17.58% from 16.76%. This is an indication that despite the pressure on earnings and profitability, the bank is still efficiently optimizing its returns, which is a positive thing.

Balance Sheet dynamics
Balance sheet movement was noticeably skewed towards safety in H1 -2016. Cash and balances with the CBN was marginally down by 2% to N715.87billion ($2.20B) from N701.15billion ($2.25B) between Dec 2015 and Jun 2016.

The rapid movement in the loans and advances to other banks which spiked by 85% to N724.42billion ($2.28B) from N385.77billion ($1.21B) was a give away as to the focus of the bank in the review period.

On the other hand, loans and advances to customers rose by 19.8% and ideally could have been better considering that the margins are stronger when risk assets are created/extended to customers. However, the pressure on the economy was a major hindrance in finding bankable projects.

ROE shrank to 5.86% from 6.92% Year end to date, while ROA dropped to 0.75% from 0.96%. The bank was clearly not immune to the pressures from the economy which had hampered the optimization of resources in H1 2016.

Valuation Analysis
Based on our analysis, the stock is currently trading at a 15.72% discount to our estimate fair value of N3.68, with a 12Month investment horizon. In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our expectations for FY 2016

Our fair value for FBNH shares was calculated using the Price to Book Value method of valuation as well as the Dividend Discount Model comprising our expected dividend estimate for the Bank and a GTI Securities customized tweak to adjust for the risk of investing in the Nigerian Financial Services sector. Our Required Rate of Return (RROR) factors in a risk premium of 9% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.

We have placed a NEUTRAL rating on the stock of FBNH

Our FY 2016 gross earnings forecast for FBNH is N404.20 billion ($1.271B), while our net income estimate for FY 2016 is N52.54 billion ($216.08M). This yields an EPS of N1.46 and a forward P/E of 2.07X.

We expect the bank’s shareholders funds to close the year at N630.89billion ($1.98billion) amounting to a 9% rise from the position as of FY 2015 and 3.1% rise from the position as of 30th June 2016.

The bank’s net assets have grown by 11% (CAGR) over the past 5years. Our growth expectation of 9% is informed by the remarkable spike in loan loss provision which came in at mind-blowing N57.16billion ($179.75M) in Q2 2016 alone, an unenviable 113% spike from the Q1 2016 position. The cumulative YTD impairment charge for credit loss as at review period was N69.91billion ($219.85M). Our net book value estimate produces a forward ROE of 8.33%.
Investment Conclusion
We are particularly worried about the rising NPL for FBN especially in Q2-2016. The non-disclosure of related party loan exposure which historically used to be around 30% of total loan book is not comforting, considering the history of the bank in creating related party loans that may go bad.

We are also worried about the impact of the weaker Naira on the foreign currency portion of the bank’s loan book and the resultant effect on capital adequacy.

We have a HOLD recommendation on the shares of FBNH

Investment Risks
Operational: inefficient deployment of balance sheet assets, weak risk assessment framework for risk asset creation and potential rise in NPL are all areas that can potentially alter our forecasts

Policy changes: the potential for a rapid change in monetary policy heightens the risk of underperformance.

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