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FBN HOLDINGS PLC FY'20 (Unaudited) Earnings Release - Profit for the year boosted by Insurance sale

Profit growth achieved through business divestment
FBNH released its unaudited FY’20 results, reporting a 3% y/y decline in Gross Earnings to ₦574 billion (Vetiva: ₦579 billion). This was a result of the 11% y/y drop in Interest Income to ₦387 billion, mainly caused by a 24% y/y fall in income from investment securities. Meanwhile, Non-Interest Income came in better than expected, growing 19% y/y to ₦188 billion (Vetiva: ₦174 billion), thanks to a 190% surge in income from sale of investment securities. Due to the pandemic and its effects on economic activity, general expectation in the banking sector was that Provisions would surge, with FBNH expected to see as much as 28% higher loan losses. However, the bank reported flat provisions of ₦51 billion, while Opex grew by only 1% y/y to ₦315 billion. Overall, this led to a PBT of ₦78 billion, a 4% y/y improvement and PAT of ₦66 billion, flat y/y. That said, due to the bank’s divestment from its insurance arm and sale to Sanlam, the bank reported a profit from discontinued operations of ₦14 billion, bringing its Profit for the year to ₦80 billion (Vetiva: ₦78 billion). This yielded an EPS of
₦2.18, ROAE of 11% and ROAA of 1.1% for the period.

Earnings momentum slowed in the final quarter
Historically the weakest quarter for profits, the company’s Q4 earnings showed a decline across most line items, with Gross Earnings coming in 5%
lower q/q (₦135 billion) after a 2% decline in Interest Income to ₦89 billion and a 12% drop in Non-Interest Income to ₦46 billion. However, thanks to
ever-decreasing interest rates, the bank’s Net Interest Income actually improved 4% q/q to ₦64 billion, after Interest Expenses fell 14% from Q3
to Q4. Furthermore, Provisions also declined in the final quarter, coming in at ₦4 billion, 74% lower than Q3. Finally, Opex came in 20% higher q/q at
₦91 billion. This meant that PAT came in 38% lower q/q at ₦12 billion. Looking forward, we expect improvements in Q1, which based on historical
performance is one of their strongest periods.

TP revised to ₦11.98 (Previous: ₦11.93)
Due to the bank’s results coming in close to our expectations, we have made some adjustments, mostly to our balance sheet forecasts for 2021. Firstly,
we raise our Net loans and advances forecast to ₦2.2 trillion (Previous: ₦1.9 trillion), Deposits to ₦5.4 trillion (Previous: ₦4.6 trillion) and total assets of ₦7.9 trillion (Previous: ₦7.2 trillion). Furthermore, we raise our FY’21 dividend expectation to ₦0.45/share from non-banking operations (Previous: ₦0.41). Thus, we adjust our Target Price (TP) to ₦11.98 and reiterate our BUY rating on the stock. The stock is currently trading at ₦7.55, 58% below our TP and at forward P/E and P/B of 3.1x and 0.4x respectively, compared to industry averages of 3.8x and 0.7x.