EUR 4.00 For Business Accounts Only

Initial View - FBN Holdings Plc - Lower provisioning, rising cost

• FBN Holdings Plc (FBNH) released its unaudited Q2 19 result after close of trading yesterday, recording EPS growth of less than 1% QoQ to N0.44 (above our estimate of N0.36). Largely, while we had expected a more aggressive provisioning of over the quarter, the bank booked a much lower provisioning. However, the gains from the provisioning were eroded by a much higher operating expense over the period of N77 billion (estimate: N68 billion).
• Notably, the bank fully write-off its exposure to Atlantic Energy over Q2 to the tune of N126 billion – which was provisioned for through an equity charge in the prior year – and additional N15.7 billion from stage 1 & 2. Accordingly, the bank’s NPL ratio declined to 14.5% in Q2 19 from 25.3% in Q1 19, with NPL coverage moderating to 64.5% (Q1 19: 82.3%). Reflecting the write-offs, the bank’s gross loan declined 9% QoQ to N1.9 trillion. However, net loan grew 4.2% QoQ to N1.7 trillion suggesting the bank created additional N43 billion loans over the quarter. Elsewhere, the surprise jump in opex emanated from higher staff cost and Other operating expenses. Not so surprising, the increase in other opex stemmed from operational and other losses, which management stated it is related to HR transformation initiatives which encompasses voluntarily resignation of some staff.
• On earnings, the group recorded moderation in annualized NIM by 50bps QoQ following faster decline in assets yield (-80bps QoQ) compared to WACF (-10bps QoQ). The decline in asset yields resulted from decline on interest on loans (75 QoQ) and increase in interest earning assets over same period by 3.2%. Accordingly, net interest income declined 2.2% QoQ to N72 billion. Elsewhere, NIR remained resilient, expanding 11% QoQ to N33 billion due to higher net insurance income, FX gain and dividend income.

 

• While we acknowledge the improvement in NPL, we are concerned by the contraction in capital adequacy ratio (CAR) to 15.6% (FY 18: 17.26% and Q1 19: 16.5%) and rising operating cost. FBNH trades at current PB of 0.4x, at a discount to peer average of 0.8x.
• Our last communicated FVE of N9.12, translates to a STRONG BUY recommendation on our rating scale, key risks to our expectation is a more aggressive write-off during the year which could result in a much higher provisioning than expected. As such, we see the play in FBNH as a beyond 2019 game.

H1 2019 analyst and investors conference call: FBNH would be hosting a conference call on 30 July at 15.00 Lagos & London time. For more details,