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FBN Holdings Plc: Attractively Priced as Concerns Are Overcooked

We maintain our STRONG BUY rating on FBN Holdings with a revised FVE of N14.40/share (from N16.69/share) due to our lower loan book forecast (-2% YoY) and an upward revision to loan loss provision to N117.2 billion (previously: N78.5 billion). Given the 5% QoQ decline in net loans over Q1 18, we think management’s guidance of 7-10% looks unlikely as the bank will be more cautious on risk asset creation, and thus expect the bank to revise downwards its loan growth target. However, we keep our upbeat view as;

• Asset Quality Recovery on Track. Over 2018, we expect asset quality to be healthier than prior year with FY 18E NPL ratio of 18.0% (Q1 18: 21.5%, 2017: 22.8%). For context, excluding re-classification of 9mobile and FCY translation impact on non-performing exposure in 2017, NPL should have printed at 19.5% relative to 22.8% that was reported. The bank’s NPL is largely concentrated in the Upstream Oil & Gas and ICT sectors of 42% and 14% respectively. Consequently, save for Atlantic Energy loan of ~ N145 billion which government’s involvement has slowed the remediation process, we expect other NPLs in these sectors, particularly 9mobile, to be transferred to the performing loan category over 2018. Farther out, we expect NPL ratio to moderate to 16% and 11% in FY 19F and FY 20F respectively.
• Lower provisioning to drive notable jump in earnings. Despite our upward revision on Cost of Risk to 6.0% guided by our expectation of a prudent approach on Atlantic Energy remediation, the implied loan loss provisioning is 22% lower YoY to N117 billion. For subsequent years, we forecast CoR of 4.0% and 3.5% in FY19F and FY 20F, which implies loan loss provisioning of N4 billion and N79.6 billion respectively. Consequently, we estimate EPS growth of 26.3% YoY for FY 18E to N1.68.
• Impact of declining yields will be modest on NIMs. We expect a moderate impact of lower asset yields (-66bps YoY to 13.3%) as the yield on loan book has been relatively sticky, with lower interest rate environment only impacting the yield on its treasury assets. Consequently, with a slight moderation in funding cost (-18bps YoY to 3.2%), Net Interest Margin (NIMs) should print at 9.3% (-56bps YoY).
• Growth in core fee income to moderate NIR compression. We are negative on gains from FX and trading lines over 2018 and now forecast ~50% decline in these lines over the period. However, we expect fee income to deliver positively with a growth of 7% YoY. Much of this gain will be coming from the e-banking business. Furthermore, we expect a 20% YoY growth in net-insurance income, 10% YoY growth in dividend income and 5% YoY growth in other operating income. Consequently, NIR should decline by just 8% YoY to N3 billion over FY 18E. In our discussion with management, ~80% of the customer induced transactions, from its ~13 million active customer accounts, are done on its digital platform. First Bank currently has at least 35% of all electronic traffic in Nigeria either by count or value on the Interswitch platform and remains the only bank to process over 100million transactions per month on the Interswitch platform multiple times. Similarly, its agency banking solution, currently in a pilot phase, is delivering impressive results which will further enhance fee income.
• Undemanding valuation not justified. FY 18E price-to-book (P/B) of 0.53x is undemanding, and at a 44% discount to Tier 1 average of 0.9x. While there is a case for a justified discount, we think based on performance, ~15% valuation discount is a worst-case gap for FBNH relative to peers. Our adjustments put FY 18E ROE at 9.1% (FY 17: 7.2%).