FBNH 2020 H1 Result: Profit Up 14.3% Y-o-Y, But Growth Strategy Still Vulnerable

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Sunday, August 09, 2020, / 04:00 PM / By Proshare Research   /  Header Image Credit: FBNH


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FBNH has caught the eye of Nigeria's local media for a splendid H1 2020 result as gross earnings rose year-on-year (Y-o-Y) by +5.6%from N280.3bn in June 2019 to N296.4bn in June 2020. Profit before tax (PBT) climbed by +14.3%, from N36.3bn in June 2019 to N41.4bn in June 2019. FBNH's management has represented that the Group was determined to restore its leadership position in the banking sector, but beyond the optics of tough talk, this might be a slight stretch.

 


Key Highlights

  • Gross earnings rose +5.74% from N280.3bn in June 2019 to N296.4bn in June 2020. The slight growth in gross earnings was reflective of a slowing down of overall economic growth primarily as a result of a series of lockdowns in critical manufacturing and financial services centres of the country. The lockdowns caused by the spread of the coronavirus pandemic has led to major supply chain disruptions, factory closures and job losses, which have combined to reduce disposable incomes, increased factory inventories and cut back domestic production. The Central Bank of Nigeria's (CBN's) purchasing managers index (PMI) has since dropped from 60.8 in December 2019 to 44.9 in July 2020.


  • Operating income of the Group rose by +7.7% Y-o-Y, from N196.3bn in June 2019 to N211.4bn in June 2020. The modest uptick in operating income reflected the slow expansion of the domestic economy, in Q1 2020 gross domestic product (GDP) grew at +1.87% which was slower than the +2.1% in the contemporary period of 2019. The financial group appears to have done well operationally but some operational clawbacks seem to stain the group's performance as the quality of loan assets poses difficulties.


  • Impairment charges for loan losses rose by +38.6% from N22.1bn in June 2019 to N30.7bn in June 2020. The FBNH Group has been struggling to moderate its loan loss growth in the last few years as its legacy loan assets from the global financial crisis between 2016 and 2017 still leave footprints on its statement of financial position. With the CBN's recent 2019 policy of a statutory loan-to-deposit ratio (LDR) of 65%, an attempt by FBNH to grow loans in a depressed economy in 2020 may worsen its LDR. 


  • Profit after tax (PAT) went up by +56.33% which was +41.97% higher than the growth in profit before tax (PBT) of +14.36%The financial group benefitted from a tax adjustment reprieve that significantly altered after-tax profit for the half-year. The surge in post-tax profit does not appear to be the result of normal business activities and so analysts may decide to lean towards restricting themselves to the group's pre-tax profit. The group's pre-tax profit rose from N36.2bn in H1 2019 to N41.4bn in H1 2020. It should be noted that the Holding company's group managing director (GMD), UK Eke, attributed the over +50% growth in PAT to other factors than tax adjustment gains, according to the GMD in a company press release on July 29, 2020, "We have been able to achieve this feat by leveraging our agent banking network, innovative e-banking capabilities, and operational efficiency utilizing technology". The growth in FBNH's gross revenue for the half-year 2020 may be attributed to these factors but the same cannot be said of the lunging leap in its after profit tax.


  • During the year, the group divested from its risk underwriting business and refocused its activities essentially on banking. According to the group, "we successfully divested from the underwriting (insurance) businesses to focus on our banking operations. We are confident this will enhance greater value to our stakeholders and strengthen the Group's resolve to consolidate its leadership of the banking sector. Following the divestment, FBNHoldings injected Tier 1 capital into FirstBank, effectively increasing its CAR to 16.5%. This provides a comfortable buffer against regulatory requirements with the potential to support any emerging business opportunities. Looking ahead, we remain cautious, but we are confident that our business is fundamentally strong to withstand any future challenge towards enhanced performance".     

Profit: Growing Steadily, But Soft Bumps Ahead

 

Since 2015 FBNH's profit before tax (PBT) has been on a slide, the group's PBT fell from N52.1bn in H1 2015 to N45.9bn in H1 2016 and then N35.6bn in H1 2017 in the thick of the global and national recessions. A brief earnings recovery occurred in H1 2018 with PBT rising to N38.9bn before dipping back to N36.2bn in H1 2019. In H1 2020 the financial group was able to pull profit up to N41.4bn, the highest since 2017 (see chart 1 below).

 

Whether the trend would be sustained would be dependent on several factors that are difficult to assess with any certainty. A worsening coronavirus situation could lead to shutdowns that would disrupt real sector activity, reduce banking sector interest income and potentially worsen impairment provisions and non-performing loans (NPLs). If the COVID-19 situation does to improve FBNH may see a decline in Q3 and perhaps Q4 earnings performance. The soft bumps ahead are visible but not certain if the public health pandemic does not abate.



Chart 1 FBNH The Tough Profit Road

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Source: FBNH H1 Financial Statements 2015-2020

 

 

Gross earnings Vs Profit: Not A Perfect Match

The decline in FBNH's profit before tax over the last five years has not been exactly mirrored by growth in the group's gross earnings. Between H1 2015 and H1 2020, gross earnings rose from N271,3bn in H1 2015 to N287.9bn in H1 2016, at the onset of a global recession and rose even further to N287.9bn right in the heart of the two-year global and national economic downturn.  In H1 2018 the group's gross earnings figure bounced higher to N293.3bn before collapsing in H1 2019 to close to its H1 2015 result. H1 2019 saw FBNH's gross earnings slump to N280.3bn. However, by  2020 the group's gross earnings catapulted up to N296.4bn, its highest value in the last six H1's (see chart 2 below).

 

Chart 2 FBNH Gross Earnings; Defying Gravity

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Source: FBNH H1 Financial Statements 2015-2020


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FBNH: Understanding Activity

 

The banking sector has gone through a tough season of re-ordering loan portfolios and realigning deposit liabilities with loan book growth as the Central Bank of Nigeria (CBN) forces a loan-to-deposit ratio (LDR) of 65%. Between 2018 and 2019 banks equally had to cope with the new international accounting standard for bank loan impairments imposed by the International Accounting Standards Board (IASB).

 

IFRS9 took a bite out of bank profits and shareholders funds in 2018 leaving some banks still feeling the after-effects in 2019. FBNHs shareholders funds rose from N561.7bn inH1 2015 to N611.9bn in H1 2016.  Economic tightness between 2016 and 2017 led to shareholders being nipped off slightly as shareholders funds dropped to N609.9bn in H1 2017. H1 2018 saw shareholders funds dragged up but the newly-minted IFRS rules pushed shareholders funds down to N560.9bn in H1 2019. The group appears to have recovered from the shocks to its shareholder's funds in the previous year as H1 2020 saw the banking group's shareholders funds float to N704.1bn (see chart 3 below).



Chart 3 FBNH Shareholder's Funds; Growing Muscle Memory

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Source: FBNH H1 Financial Statements 2015-2020

 

Grappling With Delinquent Loans; Breaking Bad

 

Bad loan assets have been a bane of local Nigerian banks. Delinquent debtors have been as troublesome to local lenders as flies swarming on a cube of brown sugar. Local deposit money banks have had a difficult time improving their loan asset quality as a recession between 2016 and 2017 and slow gross domestic product (GDP) rebound have hurt borrower operations and their ability to repair their commercial creditors, including banks.  

 

FBNH has been skillful in managing non-performing assets as it successfully dragged NPLs down from 22.8% in H1 2016 to 20.8% in H1 2018 and 14.5% in H1 2019.  Its best performance in managing loan assets since 2015 when NPLs were at 4.1% was in H1 2020 with NPLs hovering at 8.8%, This was 3.3% higher than the CBN benchmark of 5% but it has shown the management's commitment to improving the group's asset quality.

 

Chart 4 FBNH NPLs; Cutting Back The Pork

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Source: FBNH H1 Financial Statements 2015-2020

 

The financial group's previous bad lending habits have been replaced by a more circumspect loan culture. Lending rehab has done well for the group, but the group still has some ways to go.

 

Keeping Costs Down

 

The group may be doing a good job of improving asset quality but it still has to work on reducing its cost-to-income ratio (CIR). The banking group has held a high line in its operating costs relative to its revenue. The group's CIR was 61.6% in H1 2015 and fell to 47.4% in H1 2016 by H1 2017 (the last year of the previous recession) costs had strangely gone back up to 54.4%. In 2018 the group's cost-to-income ratio grew modestly to 56.6% but by 2019 management went on a spending binge with CIR rising to 70.3%. In a recent August 2020 analyst's conference call, the First Bank of Nigeria's group chief financial officer (CFO), Patrick Iyamabo, explained that a lot of the 2019 expenses were one-off payments to commemorate the bank's 125th anniversary. However, even in H1 2020, the bank's CIR still looks high at 65.8% (see chart 5 below).

 

Chart 5 FBNH: Holding Down The Cost Monkey

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Source: FBNH H1 Financial Statements 2015-2020

 

 

The Liquidity Play

 

FBNH's liquidity situation is fair. Between H1 2015 and H1 2016 liquidity surged from 34.7% in H1 2015 to 58.2% in H1 2016. The economy had just come off an expansionary phase at the time as it girded its loins to tumble into a recession. The financial group appears to have built temporary buffers to withstand the expected shocks. In the middle of the recession, FBNH's liquidity dropped mildly to 50.4% in H1 2017 before climbing back up to 55% in H1 2018. In 2019 the bank's liquidity fell a notch further to 40.3% signposting some concern with short-term assets, especially loan assets. 

 

Chart 6 FBHN's Liquidity Run

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Source: FBNH H1 Financial Statements 2015-2020

 


FBNH: The Investor's Note Pad

 

Investors have not been gung-ho about FBNH in recent months as a few are concerned about the group's loan asset quality and loan asset structure. The large previous (and perhaps present) exposures to the oil & gas and the energy sectors introduce an underlying vulnerability in its statement of financial position (balance sheet) and its profit and loss account (P&L) going forward that could affect dividend payouts as poor loan assets would require higher impairment charges and squeeze profit before tax (PBT).

 

FBNH needs to also reduce its CIR. The excuse of the high cost of celebrating its 125th anniversary would be lame by year-end 2020. The group's agent banking business is impressive but it needs to show up more powerfully as contributions to the group's bottom line. Since an agency banking franchise involves fairly low costs of administering the business it should then turn up as a major profit-leader for the year.

 

The group's return on assets (RoA) has slid downwards since H1 2015 but appears to have turned a corner in the recent half-year of 2020. The group's RoA fell from 1.8% in H1 2015 to 1.6% in H1 2016 and 1.2% in H1 2017, following the recessionary economic cycle downwards. In H1 2018 RoA saw a slight reversal by rising to 1.3% as recession blues gradually slid away. By H1 2019 another dip in asset returns occurred as the bank rapidly increased its loan book, perhaps as a result of the CBN's instruction for all banks to increase their LDR to 60% in September 2019 and then onto 65% by December of the same year. The financial group's books closed H1 2020 with an RoA of 1.5%. 

 

 

Chart 7 FBNH's RoA: Reversing A Slide

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Source: FBNH H1 Financial Statements 2015-2020

 

But what would be closer to the hearts of investors would be the financial institution's return on equity (RoE). The RoE was a healthy 14.8% in H1 2015 but collapsed to 12% inH1 2016 and dropped further to 9.9% in H1 2016 before levelling off at 10% in 2018. By H1 2019 the financial group's earnings fortune had started to look up with RoE leaping to 11.6%. in H1 2020 RoE skimmed just under its H1 2015 return to settle at H1 2020's return of 14.5% (see chart 8 below).  

 

Chart 8 FBNH's RoE: Keeping Investors Happy

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Source: FBNH H1 Financial Statements 2015-2020

 

 

From  bearish To Neutral; Investors Prepare To Shoot Their Shot

 

Between January and the middle of March 2020 FBNH traded within a bearish pennant slumping from N7.65 in the middle of January 2020 to a choppy support corridor between N4 and N4.70 between mid-March and mid-May 2020. By the end of May investors seem to have gotten over the shock of the coronavirus pandemic and played an optimistic card in the market by providing a backstop for the group's share price. The stock still trades at just over N5 per share but it may have seen its poorest valuation for the year as a strong Q3 performance would likely to see the stock climbing up, albeit, slowly.  

 

 

Chart 9 FBNH's Share Price Movement (Jan-Aug 2020)

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Source: FBNH H1 Financial Statements 2015-2020

 

The group's market equity price may indicate hidden value opportunities. A lot will depend on the group's earnings per share in Q3 and Q4 2020 as well as its forward growth plans.


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A Plan for Bigness; Investors Watch From The Terrace

 

Corporate Finance analysts speculate that FBNH may have decided to grow its banking business by inorganic expansion. The proponents of the view point to the group's recent decision to sell off its insurance business and inject N25bn in the deposit money bank (DMB) to shore up its capital adequacy ratio (CAR). The strengthening of the CAR, in the view of these analysts, was to position the bank to take over smaller competitors. FBNH's CAR has dropped from 18.8% in H1 2015 to 15.4% in H1 2016 before climbing back to 17.6% in H1 2017. The ratio has been variable since the end of the 2016-2017 recession with CAR rising to 18.1% in H1 2018 before being knocked to 15.6% in H1 2019 and 16.5% in H1 2020. With the new injection of N25bn in tier 1 equity capital in Q3 2020, the group's CAR may flip back to over 18% (see chart 10 below).

 

Chart 10 FBNH's CAR On The Faster Lane

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Source: FBNH H1 Financial Statements 2015-2020

 

The  strengthening of First Bank of Nigeria's CAR in Q3 2020 adds grist to analytsts speculation that First Bank may be building firepower to make an acquisition move.  Spokepersons of the bank have since 2019 made it known that the bank desires to restore its position as the sector's leading lender. One of the possible ways of doing this would be to acquire a smaller bank or banks. The strategy appears plausible but risky.

 

The move has proved invaluable to the growth of a bank like Access Bank Plc which acquired the bigger Intercontinental Bank Plc in 2011 and subsequently merged with the technology-savvy Diamond Bank Plc in 2018. However, Access Bank's play was the product of detailed work and careful financial choreography, ensuring that the acquisitions did not punch gaping holes in the new entities statement of financial affairs and profit and loss account. Access Bank's managers had ensured adequate provisions, processes and procedures to handle potential impairment charges and operational buffers to ring-fence potential financial shocks. However, the Access Bank success story appears to be a black swan.

 

Industry watchers speculate that FBNH may consider the acquisition of Heritage Bank (a legacy bank created from the old Societe Generale Bank of Nigeria (SGBN)) and Polaris Bank (which was a legacy bank created post liquidation of Skye Bank). Interestingly, Polaris Bank has seen steady improvement in its fortunes after a new management took over from the sacked management of the old Skye Bank. However, this has been with the strong support of the Asset Management Company of Nigeria (AMCON) which appears to have quarantined over N848bn in bank liabilities (this has been under the balance sheet line item of 'other reserves') in H1 2020. The amount squares with the bank's share premium liabilities of N873.5bn, leaving it with a marginally positive shareholders fund as of June 2020.

 

Shareholders will be keen to see FBNH's growth plans for 2020 and beyond unfold as they keep an eye on return on equity growth and another on addition to the corporate loan book and deposits. With the novel coronavirus pandemic tearing through economies the corporate playbook has gotten a bit more uncertain. For banking groups the growth strategy would be finding a bridge between size and customer satisfaction. In the build up to a post-COVID-19 reality big may just become beautiful afterall.  

 

 

Visit FBN Holdings Plc IR Page in Proshare MARKETS

Graph - One Year Share Price Movement

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Table:  Q2 2020 Unaudited Results

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