Analysing the Performance of FBN Holdings Plc - A Comprehensive Report


Wednesday, August 09, 2017 8:00AM / Proshare Research / @TheAnalystNG

Download PDF Report Here

FBN-Holdings’ (FBNH) rich history and the critical role it has played in both financial inclusion and intermediation precipitated the need for a performance assessment report. Moreover, the present blurred lines created by the Group’s financial performance reinforced the need to critically analyse its numbers for the financial year 2016.

An Economic and Sectoral Overview

Nigeria in 2016 slipped into recession, largely as a result of reduced oil prices, oil production and foreign exchange earnings. The business community was however able to stimulate the economy, though at a slow pace. Following the contractionary monetary policy stance of the Central bank, the economy witnessed increase in interest rates and an introduction of a flexible exchange rate regime while inflationary pressures mounted.

various macroeconomic challenges faced in this period weakened the stability of financial system. This combined with the dampened appetite for risky assets and the large exposure to the oil and gas sector put considerable stress on the banking system, as banks were forced to cut down on their operating expenses. In a bid contain the risks to financial stability; banking supervision tightened and dividend payments & bonuses was prohibited for banks with high level of non-performing loans. 

FBNH stable through the tides 
FBNH is second largest in terms of book value, customer deposits, total income and third largest in terms of loans & advances, branches network, employee base in Nigeria. However, primarily due to weak loan book and lower profitability, FBNH is currently positioned a bit lower in the overall banking sector. 

Our analysis showed that the market position was largely retained given FBNH’s deep customer deposit of N3.093trillion and a book value of N602billion. The amount of N2.063trillion in loans and advances justifies the inclusion of FirstBank among the tier 1 banks. Evidently, most of the banks risk parameters have tilted upwards which was reflective after the 2016 financial horizon. The Bank’s capital adequacy ratio remained stabilised at 17.8%. It remained the bank with lowest capital adequacy ratio among the Tier 1 banks. Regardless, it is relatively higher than the banking sector’s common equalization of 13.1% and higher than most tier 2 banks. 

The jolt in FBNH’s long term borrowing partly due to devaluation when compared to a tepid increase in equity triggered an outward cave in its gearing ratio. The report thus admits that the capacity to hewn revenue as a growth tool by the Holdco is not in doubt given the fact that it declared the highest pre-provision operating profit in the sector.  

FBNH’s consistent strong yield on its interest earning asset has contributed to its rate of revenue accretion and do share a positive correlation with its net interest margin.   Post mortem carried out during our analysis further showed a crippling in FBNH’s operating profit steaming from the increase in the bank’s non-performing loans (NPLs), as the NPLs of the bank rose to 24.4% as at year end 2016. The crippling in operating profit margin from 19.4% (2014) to 3.9% (2016) portrays the weight of credit losses on the Group’s revenue at the end of 2016. 

FBN’s 42.2% loan concentration in the oil sector made its loan portfolio have a relatively thin deviation while it appears more rent focused. The causation of a negative anti-clockwise movement in oil price on the quality of its asset was inevitable. This placed FBN as the bank with the highest quantum of non-performing loans among tier 1 banks. Thus, the fallout has been a relatively weak loan yield, erosion in asset quality and an escalation in risk. The presence of high cost of risk and the loan to deposit ratio of 77.1% has reduced FBN’s headroom for counter cyclical lending. Although loan impairment is a concern, FBN still tempered down cost to income ratio in a cycle of rising inflation.  

FBNH’s financial performance in Q1 2017 recorded a growth in operating profit from 3.9% to 14%. The healthier performance is as a result of improved macro activity and a more aggressive approach towards loan recovery.   

Finally, the report highlighted that the cost to income ratio and cost to deposit are on the up rise while it also carried out a recall on the macro environment and a comparative analysis of the banking sector. 

While we understand that Financial Institutions are not immune to global and domestic economy shocks, as this tend to affect both the ability to operate as well as the asset quality of banks; we believe FBNH can do more by: 

·         Improving its Capital Adequacy (both Tier 1 and Overall)

·         Focusing more on Non-interest Income than Interest Income in 2017

·         Improving Asset Quality and Avoid High Specific Sector Concentration

·         Rationalizing Operating Costs and

·         Leveraging Technology More to Manage its Operations 

Download PDF Report Here 

Updated on September 15, 2017 

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