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FBN Holdings PLC FY'16 & Q1'17 - Mixed performances as provisioning overshadows top line growth

​FBNH released FY’16 and Q1’17 results showing mixed performances across both reporting periods. Whilst the Group recorded strong top line performances across both periods, bottom line was pressured by deteriorating asset quality with loan loss provision coming higher than expected amidst an industry leading NPL ratio (FY’16: 24.4% and Q1’17: 26.0%). For FY’16 numbers, top line was buoyed by a 69% y/y rise in Non-Interest Income (thanks to FX revaluation gains recorded in the earlier quarters following currency devaluation) amidst a relatively flat Interest Income (up 3% y/y). Despite a notable 22% moderation in Interest Expense to ₦101 billion – 9% better than our ₦111 billion estimate, Operating Income remained flat y/y at ₦245 billion (10% below our ₦272 billion estimate). This was pressured by a whooping ₦226 billion loan loss provision recorded (significantly trumping our ₦160 billion estimate) following an additional ₦111 billion provision in Q4’16. Consequently, FY’16 Cost of Risk came in at 10.4% with an NPL ratio of 24.4%. Furthermore, with Operating Expense flat y/y at ₦221 billion (just in line with our estimate), PAT rose 11% y/y to ₦17.2 billion (supported by prior year’s low base) albeit missing our already conservative estimate of ₦42.5 billion. Despite the weak earnings, the Board of Directors proposed a dividend per share of N0.20 (Vetiva estimate: ₦0.10) – supported by earnings from other non-banking subsidiaries.

Having reported a poor performance in Q4’16 (pressured by hefty provisioning which saw the Group record a loss of ₦25 billion in the quarter), FBNH returned to profitability in Q1’17 – posting a PAT of ₦16.2 billion vs. Vetiva estimate of ₦14.7 billion. Despite coming in better than expected, the bottom line was down 22% y/y, pressured by notable spikes in Interest Expense and loan loss provision.

We have revised our estimate to reflect the deviations across the reporting periods. Whilst we revise our FY’17 top line upward to reflect the stronger than expected Interest Income, we cut our Non-Interest Income forecast marginally lower. Also, given our outlook of a stickier credit performance (Q1’17 NPL ratio at 26%), we raise our loan loss provision expectation for FY’17 to ₦111 billion (Previous: ₦93 billion). Our credit growth for FY’17 remains modest at 4%. We highlight the notable improvement in capital buffer with CAR up to 17.8% (FY’15: 17.1%). Overall, we revise our Target Price (TP) to ₦6.55 (Previous: ₦6.05). FBNH trades at FY’17 P/B and P/E ratios of 0.2x and 2.1x vs. Tier I averages of 0.6x and 3.4x respectively.