Tuesday, July 31, 2018 04:14 PM / Vetiva Research
• Earnings beat estimates – PAT up 14% y/y
• Impressive E-biz income boosts Non-Interest Income line
• Loan loss provision revised lower to reflect H1’18 run rate
• Target Price raised to ₦13.53 (Previous: ₦12.84)
Q2’18 recovers on stronger Non-Interest Income, PAT up 27% q/q
FBNH released its H1’18 results, reporting an improvement on the unconvincing start from Q1’18. Top and bottom line both came in ahead of our estimates with the PAT deviation even more pronounced. Whilst Interest Income moderated 3% y/y to ₦225 billion (much in line with our estimate), Non-Interest Income came in strong – up 21% y/y to ₦61.3 billion (Vetiva: ₦50.5 billion) following a notable 59% q/q rise in Q2’18.
Consequently, Gross Earnings rose mildly by 2% y/y to ₦293 billion (Vetiva: ₦275 billion) following an 11% q/q rise in the top line. We highlight that despite the improvement in general business environment in Q2’18, loan book moderated 3% q/q within the period (Ytd: -7%), an observation that is consistent across all the banks that have released H1’18 results so far. Notably, management attributed the strong growth in Non-Interest Income to growing income from their digital banking channels. The income line now accounts for c.24% of Non-Interest Income vs. c.13% as at FY’16.
Furthermore, amidst a mild 1% q/q growth in Customer Deposits as well as a mild uptick in interest rates in Q2’18 (OBB rate average of 14.1% vs. Q1’18: 11.3%), Interest Expense rose 16% q/q – pushing the expense line 11% higher y/y for H1’18 and 7% ahead of our estimate. The increasing risk focus of the bank appears to be paying off amidst the improving macroeconomy.
Particularly, loan loss provision moderated 15% y/y to ₦52.8 billion – coming in better than our ₦60.4 billion expectation and translating to an annualized cost of risk of 4.7%. With this, Operating Income rose 4% y/y to ₦158 billion – 10% ahead of our ₦144 billion estimate.
However, despite a 16% q/q rise in Operating Expenses - bloated by the annual AMCON charge, the expense line was contained to a mild 2% y/y rise to ₦119 billion for the half year period. Consequently, PBT rose 9% y/y to ₦38.9 billion, beating our ₦30.3 billion estimate. Overall, PAT rose 14% y/y to ₦33.5 billion – ahead of our ₦25.5 billion estimate.
TP revised to N13.53 (Previous: N12.82)
Following better than expected performance in Q2’18, we have revised our estimates across most of the line items. Although we cut our loan growth estimate to -2% (Previous: 3%) and raise our average yield on asset estimate to reflect our expectation for H2’18, our Interest Income estimate remains largely unchanged. That said, we raise our Non-Interest Income forecast to reflect the stronger growth in H1’18 and maintain the run rate for the second half of the year.
Also, we raise our Interest Expense following the miss in H1’18. More notably, we cut our loan loss provision to ₦102 billion (Previous: ₦121 billion) following H1’18 trend – translating to a cost of risk of 5.2%. We also revise our Operating Expense estimate higher to reflect the miss in H1’18. Overall, we revise our PAT estimate higher to ₦79.3 billion for FY’18 – translating to an EPS of ₦2.21.
Consequently, our Target Price (TP) is raised to ₦13.53 (Previous: ₦12.82). FBNH trades at FY’18 P/B and P/E ratios of 0.5x and 4.5x vs. Tier I averages of 0.8x and 4.7x respectively.
Olalekan Olabode firstname.lastname@example.org
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