FBN Holdings PLC Q1'20 Earnings -Solid first quarter performance amid economic uncertainty

Solid first quarter performance amid economic uncertainty                                                       

Non-Interest Income, lower provisions boost Q1 profits

FBNH released its Q1’20 results, reporting a 9% y/y growth in Gross earnings to ₦159.7 billion (Vetiva estimate: ₦154.4 billion) despite a 6% y/y drop in Interest Income; a result of the weaker yield environment during the quarter. The earnings beat came as a result of a 57% y/y jump in Non-Interest Income to ₦54.8 billion (Vetiva estimate: ₦47.8 billion). This was due to a 748% spike in income from sales of investment securities during the quarter, as well as milder, 12% y/y gains on fees and commissions. Added to this, the bank also reported only a 1% y/y increase in Opex to ₦76.6 billion (Vetiva estimate: ₦79.9 billion) and a 30% y/y decline in loan loss provisions to ₦9.7 billion (Vetiva estimate: ₦7.0 billion). The decline in provisions and tame Opex growth indicate that the bank’s strategy of improving efficiency and managing risk is starting to yield results. However, the onset of the COVID-19 pandemic is likely to test management’s strategy further in the coming quarter. Overall, the bank reported a 47% y/y rise in PAT to ₦23.1 billion, ahead of our estimate of ₦20.6 billion, the highest Q1 profits since Q1’13 (₦24.7 billion). This gives the bank an ROAE of 15.3%, up from FY’19 (12.4%).

LDR remains weak despite 10% loan growth

Surprisingly, FBNH reported an 11% q/q growth in loans and advances to ₦2.1 trillion, outstripping our expectation for slower loan growth in 2020. However, the bank’s 7% growth in customer deposits to ₦4.3 trillion meant that the bank’s Loan to Deposit ratio (LDR) improved only 16bps q/q to 49.6%. Given the bank’s focus on improving asset quality- NPLs also improved 7bps q/q to 9.2%- we do not expect the bank to place much focus on meeting minimum LDR requirements in the near term. We also expect the apex bank to grant some leeway to banks with regards to the regulation, while continuing to use the CRR debits as a form of liquidity control. Ultimately, the current economic climate does not favour further loan growth, with contractions likely to come in subsequent quarters, as default rates are also likely to increase."