Asset Quality Challenges Continue to Bite FBN Holdings Earnings, retain BUY


Friday, November 04, 2016 5:49 PM / Cordros Capital

Last week, FBN Holdings Plc (FBNH) released its nine months earnings report for the period ended September 30, 2016. Profit before tax (PBT) declined by 5.0% y/y (-51.4% q/q) while return on average equity (RoAE) fell to 9.4%, from 12.0% recorded as at H1'16. Following revisions to our estimates, we downgrade our TP to N4.16 (previous N5.00) and retain our BUY recommendation, given the potential upside of 37.29% based on its current price of N3.03.

We have revised our 2016 EPS and RoAE forecasts lower to N1.21 and 7.3%, from N1.62 and 9.7% respectively. Also, while we expect FBNH’s FY’16 PBT to grow by 129.8% y/y. Our forecast implies a loss of N8.1 billion in Q4’16, given our expectation for continued pressure on the asset quality, combined with lower foreign exchange gains to support non interest income.

Specifically on asset quality (the major driver of the cut to the earnings projection), our cost of risk and NPL expectations have been increased to 6.5% and 24% (previously 4.6% and 21.0%) and are now more reflective of management guidance. This follows a negative surprise in Q3’16 impairment charges which overshot our estimate by 116.2%. For 9M’16, FBNH reported an increase in cost of risk and NPL ratio to 6.9% and 24.9%, from 6.5% and 22.8% respectively as at H1’16.

On a positive note, we have revised our net interest income forecast higher after it outperformed our estimate by 32.4%. The major driver for the deviation was the outperformance in cost of funds which increased at a much lower rate in comparison with our expectation. Hence we have revised our estimate to match Q3’16 which we believe will be reflective of Q4’16 performance barring any major changes major changes in the monetary environment.

While we expect Q4’16 to be particularly pressured, we expect that the capitalized earnings for the full year should provide enough buffers to help maintain FBNH’s capital adequacy ratio above the 15% regulatory requirement.

Price / Returns

Target Price              (N)4.16

Current Price           (N)3.03

Implied Return        (%)37.29

Related News
1.       FBNH Declares N42.52 bn Profit in Q3 16 SP N3.00k

2.      FirstBank Partners Nigerian-British Chamber of Commerce to drive MSME Growth.

3.      FBN Holdings Plc Appoints Mr. Patrick Iyamabo as CFO for FirstBank of Nigeria Limited

4.      Appointments within the FBN Holdings Group

5.      FBN Holdings Plc Strong FX Gain Tapers Impact of Impairment Loss

6.      Devaluation Serves as Earnings Outperformance Catalyst for FBN Holdings Plc in H1 2016

7.      FBN Holdings Plc: Strong FX Gain Tapers Impact of Impairment Loss

8.     FBNH Declares N35.9bn Profit Records 10.5 PAT decline in Q2 16 SP N3.45k

9.      FBNH Issues Notification of Invitation of FirstBank ED by the EFCC

10.  FBNH Conference Call Update - Begins Complete Overhaul of Risk Mgmt Framework

11.   FBNH - Impairment charges erode returns though not without Silver-lining

12.  FBNH Q4 15 Q1 16 Conference Call Earnings Presentation The key takeaways

13.  FBNH FY 15 Q1 16 results - House cleaning as earnings plunge NPL ratio at a 10 year high

14.  FBNH Releases Q4 15 and Q1 16 Results Records 82 PAT decline in Q4 SP N3.31k

15.   FBNH Board Approves 2015 Audited Results Awaits Regulatory Approval

16.  FBN Holdings Plc Extends Closed Period to April 5 2016 Postpones Board Meeting

17.   FBN Holdings Plc Holds Board Meeting on 22nd March 2016 To Observe Closed Period

18.  FBN Holdings Plc Issues Profit Warning for Year Ended 31 December 2015-

19.  FBN Holding Plc records 13.53% decline in PAT as Gross Earnings up by 17.46 in Q3 15

20. FBNH declares N40.1 billion PAT in Q2 15 result SP N7.80k

21.  FBNH declares N22.6billion PAT in Q1 15 result SP N10.50k

22. FBNH Proposes 10kobo dividend 1 for 10 Bonus in 2014 Audited result

Related News