FBN Holdings: Basking in the realm of high NIMs
- FBN Holdings (FBNH) reported strong core earnings in Q2 17, with key metrics pointing to sustained momentum for the rest of the year. Central to core performance was the robust contribution of higher asset yields to interest income which offset pressure on funding cost to drive expansion in net interest margins (NIMs). Irrespective, overall earnings was weaker compared to prior quarter and corresponding period of 2016 as material decline in foreign exchange gains combined with higher impairment charges and operating expenses (OPEX) to drive EPS of N0.37. Excluding the foreign exchange gains in Q2 16 (N52.9billion) and Q2 17 (N2.2billion), and adjusting impairment charges in Q2 17 for similar cost of risk as with Q2 16 (8.1%), EPS should print at N0.04 (Q2 16: loss after tax of N1.05).
- Still on track for a decent FY 2017E: For the rest of the year, we see retention of a hawkish monetary policy stance as supportive of high yielding environment, which leaves scope for momentum in interest income. While loan growth should remain muted, our views on interest rates inform our forecasts for FY 17E interest income (+17% YoY to N475billion and interest expense (N146billion). For NIR, while sustained derivative gains and other income leaves scope for NIR growth over H2 17, the relatively stable outlook for FX tempers overall NIR reading (FY 17E: -43% YoY to N94.2bilion).
- However, we model cost of risk of 7.5% (H1 17: 6.2%, management guidance: 7%) and cost-income ratio of 55.6% (H1 17: 54.4%) to factor higher impairment charges in H2 17 and further slack in cost efficiency. Consequently, we forecast FY 17E PBT of N50.3billion (2016: N22.9billion) in the face of tamer prospects for NGN depreciation relative to 2016. Relative to our forecast, annualized EPS of N1.64 is 36% ahead of our FY 17E of N1.21, reflecting our views on cost​.
- Cumulative impact of the adjustments results in FY 17E EPS of N1.21 (+152% YoY). FBNH currently trades at a 2017 P/E of 4.8x and P/B of 0.3x vs. peers of 5.4x and 0.9x – ROAE of 7.2% (2016: 3.1%). In line with the wider banking sector, FBNH has rallied 78% YTD (Banking sector: +73%YTD) and in view of the high NPL ratio, we believe the stock is now richly valued and maintain a SELL rating with FVE of N5.23.
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ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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