Thursday, May 5, 2016 3:15PM/CardinalStone Research
FBN Holdings (FBNH) held its FY 2015 analyst/investor conference call on 27th April, 2016. Following adjustments to our projections, our TP for FBNH is reviewed down to
N4.12 (Previous: N5.07). Nonetheless, we retain a BUY rating on the stock. Please see below key highlights from the conference call and our outlook.
Overhauling the risk management process, seeking a new CRO
As part of a comprehensive restructuring process needed to reposition FBNH efficiently, management has begun a complete overhaul of its risk management framework. The focus is to transform the risk culture of its commercial banking entity which is the cash-cow of the group. This will be done through improved customer selection process, transaction structuring, monitoring, and aggressive remediation. To drive these changes, FBNH is currently seeking a new chief risk officer who will transform the risk management culture of the group. By reducing approval limits across grids, limiting its Oil & Gas exposure and further diversifying its loan portfolio, management is aiming to improve on asset quality and reduce non-performing loans (NPL) in 2016. Despite the expectation of improved asset quality, management's target for NPL in 2016 remains very elevated at 18%.
Remediation on Atlantic Energy exposure slow, some impairment has been taken
The documentation process with all stakeholders in the remediation of the Atlantic Energy exposure is ongoing. Management mentioned that the process has been slow and further explained that the group's low coverage ratio (40.2%) is caused by little impairment provisioning on the Atlantic Energy loan (and some other major exposures) despite forming part of the NPL, since progress is being made on the remediation process. They expect coverage ratio to return to 100% when the remediation process is completed.
FBNH to leverage on retail network to drive digital banking
Also, management intends to tweak its business model to become more transaction and services focused than being credit led. This suggests that FBNH plans to drive its gross earnings through non-interest income. Given FBNH's wide and large retail network, management hopes to gain competitive advantage in the digital and transaction banking space which will significantly boost income from e-banking.
To boost efficiency, management tightens hold on costs
FBNH made significant progress in cost efficiency in Q1'16 as its cost to income ratio declined to 59.4% from 65.1% in Q1'15. Management has started tightening control around procurement and has also reduced other operating expenses such as business travel and advertisement costs. Also, management intends scaling down donations by as much as 40% and will right-size as processes become more technologically driven, all in a bid to drive down costs and deliver better returns to shareholders. FBNH targets a cost to income ratio of 57% - 58% in 2016 (vs 61% in FY'15).
Following our adjustment for higher risk premium and a review for our expectation for the group, we revise our target price to
N4.12 from N5.07 which implies a 16.7% upside potential from current price N3.53. We therefore maintain our BUY recommendation on FBNH. FBNH is trading at 0.2x forward P/B compared to NGSE B10 index forward P/B of 0.5x