Earnings to Outperform in FY-2017 Despite Asset Quality Pressure

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November 2, 2017/Cordros Research

First Bank of Nigeria Holdings Plc (”FBNH”) released unaudited Q3-17 results, wherein gross earnings grew marginally by 1.85% q/q and 0.40% y/y (1.77% above our estimate), while PBT and PAT rose 28.01% q/q (71.19% y/y) and 24.44% q/q (145.47% y/y), respectively. The growth in earnings was supported by (1) growth in funding income (by 7.73% q/q and 17.43% y/y, in line with our estimate), which more than subdued the 6.57% and 37.91% y/y contraction in NIR (above our estimate by 13.30%) and (2) decline in opex by 3.51% q/q (+2.27% y/y).

While the performance over 9M-17 is broadly in line with our estimate, we have now revised estimate for Q4 and FY-2017 upward to reflect the relative consistency over the first three quarters of 2017, compared with same periods in 2016. We revise gross earnings growth forecast slightly higher to 0.81% (previously -4.63%) in 2017F to N586.54 billion, on expected higher growth in interest income and a lower contraction in NIR. While we maintained our 2017F costs or risk estimate, we have lowered net loan growth estimate by 8.76%. As a result, we now forecast PBT and PAT growth of 107.87% and 214.18% (previously 51.78% and 51.74%) to N65.92 billion and N53.85 billion respectively. As a result, our 2017F EPS of N1.50 is now 107.06% higher than the previous estimate of N0.72.

We revise asset yield estimate for 2017F higher to 12.45% (previously 11.65%), on expected continued elevated yields on interest earning assets over Q4 (expanded 210 bps y/y to 12.28% in 9M-17). Overall, we look for interest income growth of 17.88% (previously 12.38%) to N477.76 billion. On NIR, we believe the growth in net insurance revenue, dividend income, and other operating income will persist for the rest of the year. However, we expect a significant contraction in foreign exchange – reflecting the limited legroom for revaluation gains in 2017 with the relative stability of the NGN –, as such, we have lowered the expected contraction in NIR to 45.41% (previously 51.63%).

While we acknowledged the moderation in interest expense in Q3, it has increased 34.45% over 9M-17, with cost of funds expanding 80 bps to 3.50%. We have revised our 2017F cost of funds estimate higher by 16 bps to 3.85% (+62 bps y/y), translating to 31.54% growth in interest expense to N132.64 billion. However, with the upward review of the high yields on interest earning assets, we believe the impact of the expansion in cost of funds will be muted, thus, we estimate net interest margin to decline 13 bps to 8.72% (previously 8.49%).

Over 9M-17, asset quality deterioration persisted, albeit with some respite as NPL ratio moderated 190 bps to 20.10% compared to H1-17. However, annualized cost of risk remains elevated, rising 20 bps to 5.60% (annualized), following additional provisioning of N35.18 billion in Q3-17, which raised total loan loss provision during the period to N97.69 billion, albeit 14.93% lower compared to N114.72 billion in 9M-16. Following the moderation in NPL and the 90.08% y/y growth in net recoveries from loans previously written off (with an additional recovery of N1.32 billion over Q3), we have revised our forecast NPL to 19.55% (previously 21.65%), but maintain our 6.65% estimate – translating to additional provisioning of N45.85 billion for Q4 and total credit loss provision of N143.47 billion for 2017F.

We estimate opex to rise 5.16% y/y (previously 1.53%) to N232.34 billion in 2017F – translating to a 559 bps y/y expansion in CIR to 52.60% and decline in operational leverage to 4.8x (from 5.0x in FY-16).

While noting the (1) limited room for any significant growth in FX trading and revaluation gains with the relative stability of the naira and (2) impact of the adoption of IFRS 9 from 2018F, which should drive 70 bps expansion in cost of risk, we believe FBNH’s long position in fixed income securities (interest earning assets 11.53% y/y) will continue to drive growth in interest income over 2018F. On net, we revise our target price on the stock higher to N7.38 (Previous: N6.41) and roll forward our valuation to 2018F.

Our current 12-month TP implies upside potential of 12.83% from current levels; consequently, we recommend a HOLD on the stock. FBNH is currently trading at 2017F P/BVPS of 0.4x (below the peer average of 0.9x and 5-year average of 0.7x) and 2017 FP/E of 4.1x (below the peer average of 4.7x and the 5-year average of 7.2x).

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