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Initial View- FBNH FY 2020 - NIR saves the day

NIR saves the day

• FBN Holdings Plc (FBNH) released its FY 2020 unaudited results which showed marginal expansion in PBT by 3.8% YoY to N78.1 billion. The growth in PBT reflects expansion in NIR and lower impairment during the period. That aside, key pressure points in the results were lower interest income and higher operating expenses. Meanwhile an increase in effective tax rate during the period (+31.8% YoY) led to a moderation in PAT by 0.2% YoY N65.9billion. Overall, factoring in the profit from discontinued operations, PAT rose 8.2% YoY to N79.7 billion.
• As mentioned earlier, Non-Interest revenue expanded by 21.9% YoY to N168 billion on the back of gains on sales of investment securities and debt securities (+190% YoY). In addition, increases in credit related fees (+74% YoY), letters of credit and commission fees (+100% YoY) and other fees (+80% YoY) also supported total growth in NIR.
• Largely mirroring the lower yield environment, interest income moderated by 10.5% YoY to N386.6 billion reflecting lower interest income on investment securities (-24% YoY) and reduced interest income on loans to banks (-61% YoY). This neutered a 3% increase in interest on loan to customers – a fallout of higher loan growth (+20% YoY to N2.2 trillion). Meanwhile, interest expense declined by 14.7% YoY to N129.9 billion, mirroring declines in interest expense paid on deposits from customers (-20% YoY) and borrowings (-26% YoY). We believe the moderation echoes the reduction in interest rate on savings deposit, implemented in September 2020 as well as the lower rate environment. However, net interest income moderated by 8.2% YoY, due to the fall in interest income. On balance, NIM contracted by 240bps mirroring faster decline in asset yields (-400 bps YoY).
• FBNH reported slightly lower loan loss provision of N50.87 billion (-0.4 YoY) with cost of risk moderating 50 bps to 2.3%. Operating expenses over the year rose slightly by 1.6% YoY to N295.7 billion. However, cost to income ratio declined marginally to 69.6% (FY 19: 69.7%), due to a faster rise in operating income (+1.7% YoY).
• Elsewhere, Q4 2020 standalone showed moderation in PBT and PAT by 32.4% YoY and 38.1% YoY respectively, with lower NIR (-12.4% QoQ) and higher operating expenses (+21.9% QoQ) the anchor for the performance. For context, a steep decline in gains on sale of investment securities (-350% QoQ) and a fall in dividend income (-74% QoQ) spurred the moderation in NIR. Meanwhile, net interest income rose by 4.1% QoQ to N63.9 billion, mirroring a steeper decline in interest expense (-13.6% QoQ) relative to interest income (-1.6% QoQ). Further down the line, operating expenses rose 21.9% QoQ while the bank booked lower impairments (-73.8% QoQ).
• While we await FBNH audited results, we expect to see NPL ratio at a single digit, supported by write-offs and recoveries (8.8% as at 9M 2020). This implies the bank could be able to pay dividends going forward following CBN’s regulation. Elsewhere, while interest income concerns may remain in the nearest future, we expect lower funding cost as well as loan growth – induced by the Covid19 pandemic – to provide respite to NIMs.
• We will give update to our forecasts for 2021 following release of the audited result. Our last communicated FVE of N9.4, translates to a STRONG BUY recommendation on our rating scale. FBNH trades at a current P/B of 0.37x, close to 5-year average of 0.38x.

 

from continuing operations

A fallout of growth in loan book (+20% YoY)

Banks with NPL ratio above 10% are not allowed to pay dividend.