FBN HOLDINGS PLC 9M'19 Earnings - Improvements In Asset Quality And Non-Interest Income

Interest earnings decline, expenses rise q/q

FBNH released its 9M’19 results, reporting weaker q/q performance across some key line items. Interest Income came in 4% lower q/q at ₦106.7 billion, (Vetiva estimate: ₦111.6 billion); largely a result of a 12% decline in income from investment securities. Meanwhile, Interest Expense worsened 10% q/q to ₦40.9 billion, (Vetiva estimate: ₦37.8 billion), driven by a 17% q/q spike in interest paid on deposits from customers and interbank placements. Overall, Net Interest Income declined 11% q/q to ₦64.7 billion (Vetiva estimate: ₦73.7 billion). However, the bank reported a 23% q/q decline in provisions on loans to ₦6.4 billion (Vetiva estimate: ₦18.3 billion) The continued focus on improving asset quality and taming loan loss has led to an improved NPL ratio of 12.6%, from 14.5% at H1’19."                                                      

Non-Interest Income a positive

The bank reported a 1% q/q improvement in Non-Interest Income. Specifically, net gains on investment securities improved by 463% q/q to ₦3.7 billion, alongside a 9% q/q increase in net fees and commission income to ₦22.6 billion. However, the bank’s operating income came in 7% lower q/q at ₦105.3 billion (Vetiva estimate: ₦112.5 billion), subdued by the decline witnessed in net interest income. With Opex dropping 6% q/q, the bank’s PBT came in at ₦20.2 billion. Overall this resulted in a Q3’19 PAT of ₦20.1 billion, 24% above our forecast. "                                                  

Cost efficiency still a worry

While FBNH managed to reduce operating expenses in the third quarter, the bank’s cost-to-income ratio worsened to 71.5% at 9M’19 (9M’18: 59.5%). We highlight that the bank’s costs remain significantly higher than its Tier-1 peers. This could be partly attributed to the significant professional fees and regulatory costs that the bank has borne over the past three quarters. However, the 19% y/y increase in operating expenses (ex-provisions) to ₦238.6 billion is a concern and could continue to drag cost-to-income, provided the bank does not manage this in 2020.