FBN Holdings Plc H1’17 Results – Weak Underlying Earnings Compound Outlook


31/7/2017/United Capital  Research

FBN Holdings Plc (FBNH) released its H1-17 results this afternoon, showing a 7.8% y/y growth in Gross Earnings (GE) from N267.9bn to N288.8bn. PBT and PAT however declined by 22.4% and 17.8% to N35.6bn and N29.5bn respectively.

Deposits and loan books contracted by 3.5% and 4.1% to N3.0trn and N2.0trn, respectively on FY-16. We update our estimates for the bank following these numbers and review our expectations for rest of the year.

Feeble non-interest income clogs top line.
The bank’s GE saw a modest 7.8% growth y/y with interest income up 37.3% y/y. However, a sharp drop (-90.5% y/y) in FX gain drove a 46.3% y/y contraction in non-interest income, though up 30.6% q/q.

Looking closely at performance within Q2-17, the increase in interest income merely reflects a 7.9% and 11.8% expansion in the loan book and securities portfolio respectively.

The bank saw a weak contribution from the investment portfolio (-7.9% q/q) which came as a surprise given the elevated interest rate environment within the period.

Overall, the bank’s performance across funding and non-interest income lines was behind our expectations and, in our view, appears to have been weighed by the bank’s focus on legacy assets.

NPLs blight earnings as OPEX rises.
Asset quality challenges persisted over H1- 17 with annualized Cost of Risks increasing to 6.1% (Q1-17: 4.8%) despite a decline in NPL to 22.0% (Q1-17: 26.0%).

In spite of the recent upbeat guidance from management, progress in the remediation of the bank’s top exposures appears to have been slower than expected even as the run-rate of provisioning increased over Q2-17 (+16.7% q/q).

We await management’s latest guidance on the reclassification of key exposures like Ontario, Atlantic Energy, and Aiteo and the outlook on same going into H2-17.

On account of the tepid growth in top line and a 9.6% q/q increase in OPEX, Cost-to-Income Ratio increased to 54.4% (Q1-17: 53.3%). OPEX increased 10.2% y/y providing additional pressure on the bottom line.

Target Price revised on mixed earnings outlook.
This result underperforms our estimates and tracks behind management guidance along key lines. Looking ahead, additional pressure from OPEX looks set to compound asset quality woes.

The weakness in underlying earnings remain a concern. For the rest of H2-17, given the lackluster trend in non-interest income, earnings outlook is mixed and tied to the prospects of recovery efforts as well as the pace of recovery in the real economy.

FBNH now trades at a P/BV of 0.3x vs 0.9x and 1.9x for Nigerian and EM peers. Following revisions to our estimates, we have revised our target price to N4.9. We therefore rerate the shares SELL.