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Initial View - FBN Holdings Plc - Material loan write-off, still swollen NPL

• FBN Holdings Plc (FBNH) released its audited FY 18 result after close of trading on Friday, with a double-digit EPS growth of 31.4% YoY to N1.66 (below our estimate of N1.70). The earnings growth emanated largely from a material decline in loan loss provisioning by 42% YoY to N86.9 billion, which masked decline in operating income (-7% YoY) following drag in net interest income (-14.3% YoY) which more than outweighed stronger growth in non-interest revenue (+16.2% YoY). Beyond the reported earnings, FBNH equity was adjusted for the initial application of IFRS 9 to the tune of N212.3 billion (Retained earnings: N169.7 billion and Statutory reserves: N42.8 billion), which resulted in a material decline in retained earnings to N4.4 billion (FY 17: N170.8 billion).
• More surprising was the Stage 3 corporate loan write-off of N185 billion. While we believe this could be related to the bank’s exposure to Atlantic Energy, which is currently estimated at N109.2 billion (after adjustment for 30% provision over 2017), we will seek clarity on the source of the excess of N75.8 billion. Notwithstanding the write-off, the bank’s NPL still expanded to 25.9% from 22.8% in FY 17.
• In terms of NIR (+26.4% YoY to N93 billion), the bank reported additional N8.8 billion foreign exchange gains over Q4, which pushed cumulative FY 19 gains to N32.6 billion (+54.6% YoY). Further supporting the robust NIR growth are healthy net fee income (+21% YoY to N75 billion), net insurance income (+39% YoY to N18 billion) and gains on AFS securities (+119% YoY to N5.7 billion). The major drag over FY 18 stemmed from NIM which contracted by 146bps YoY. In terms of driver, interest expense expanded 8.8% YoY to N150 billion, with funding cost remaining sticky at 3.4%. Irrespective, asset yields came in lower by 113bps YoY with interest income declining 7.5% YoY to N434.4 billion.
• Same rhetoric dominates Q4 numbers. Over Q4 18, EPS printed at N0.45 (+29.5% QoQ) with support emanating from lower provisioning (-54% QoQ). Similar to the full year numbers, operating income came in lower (-2.5% QoQ) following decline in net interest income – fallout of a faster contraction in assets yield (-169bps QoQ) compared to decline in funding cost of 73bps QoQ. Elsewhere, the additional FX gains booked in Q4, supported 20% QoQ growth in NIR to N38.5 billion.
• On regulatory capital, capital adequacy ratio (CAR) adjusted for the CBN forbearance on the full impact of IFRS 9 stood at of 17.26% (FY 17: 17.74%) and liquidity ratio of 45.2%. However, adjusting for the full impact of IFRS 9, CAR at the end of 2018 declined to 10.66%. The bank declared dividend of N0.26 (FY 17: N0.25), which translates to a dividend yield of 3.5% (FY 17: 4.8%) at current pricing.
• FY 2018 analyst and investors conference call: FBNH would be hosting a conference call on 26 April at 15.00 Lagos & London time. For more details,