FBN Holdings Plc published its much awaited audited FY:2015 and Q1:2016 results on 26th March, 2016 on the floor of the Nigerian Stock Exchange (NSE) with Gross Earnings and Profit After Tax coming much lower than anticipated.

Skewness to Oil & Gas loans impacted on profitability as a monumental N119.3bn was booked in impairment charges for its FY: 2015 dragging profitability by 82.0%.

We present the highlights of the results and our revised 2016 estimates below.

FY: 2015 PAT Slumped 82.0% Y-o-Y on N119.3bn Impairment Charges
Noting the overwhelming pressure in the global and domestic macroeconomic space, FBN Holdings Plc submitted a FY: 2015 gross earnings of N505.2bn, up 4.9% relative to N481.8bn in prior year, driven by growth in interest income which rose 9.3% Y-o-Y as against non-interest income which came in weaker at 12.0% Y-o-Y down.

While this was well below our FY:2015 gross earnings projection of N573.2bn (11.9% variance) for the same period, gross earnings for Q1:2016 came in even lower, down 15.2% Y-o-Y to N107.5bn from N126.8bn in Q1:2015, as both interest and non-interest income plunged 12.4% and 23.7% respectively.

Although the Group had earlier issued an earnings alert stressing that higher loan loss provisioning may weigh heavily on profitability, FY: 2015 PAT tumbled 82.0% Y-o-Y to N15.1bn from N84.0bn in prior year as impairment charges for the period rose 360.6% Y-o-Y to N119.3bn on account of FBNH’s disproportionate exposure to oil & gas sector (39.5% of Gross Loans) and foreign currency loans (65.0% of which relates to Oil & Gas).

This was rather staggering by our assessment given our initial PAT projection of N42.7bn for FY:2015. The Group further booked an impairment charge of N12.8bn in Q1:2016, hence, PAT dipped 8.3% Y-o-Y to N20.7bn in Q1:2016 from N22.6bn in prior period.

Consequently, PBT and PAT margins shrank to 4.3% and 3.0% in FY:2015 from 19.5% and 17.4% in FY:2014 respectively even as ROAE and ROAA eased significantly to 2.7% and 0.4% in 2015 from 16.9% and 2.0% in that order. Performance in 2016 is expected to remain weak as asset quality continues to pressure yields amid soft loan growth outlook.

Thus, we forecast gross earnings growth at 1.5%, however, PAT is expected to surge significantly due to base effect.

CIR to Improve as Management Intensifies Efforts to Control Cost
FBNH’s Cost to Income Ratio (CIR) improved from 65.2% in FY:2014 to 59.8% in FY: 2015, this was largely driven by moderation in operating expenses which declined 5.6% Y-o-Y in 2015. CIR further improved in Q1:2016, settling at 58.0%.

Further scrutiny indicated that net interest income expanded 8.7% Y-o-Y to N265.0bn in 2015 despite 10.5% increase in interest expense during the period. Thus, NIM rose from 7.6% in FY: 2014 to 8.1% in FY:2015 and Q1:2016. With new management in place, we anticipate an improvement in operating efficiency as the Group intensifies effort to contain cost and improve operating margins.

NPL Ratio at 18.1% in FY: 2015 from 2.9% in FY: 2014
FBN Holdings loan book contracted 16.5% Y-o-Y in FY:2015 and dipped further by 2.3% in Q1:2016 to settle at N2.2tn.

However, non-performing loan (NPL) ratio jumped dramatically from 2.9% to an alarming 18.1% in FY: 2015 worsening to 21.5% in Q1:2016 as risk environment toughened.

Similarly, Cost of risk rose to 5.7% in FY: 2015 from 1.3% in FY:2014 but eased to 2.6% in Q1:2016 as credit impairment charges expanded 360.6% Y-o-Y to N119.11bn in FY:2015.

We think FBN Holding’s massive exposure to the Oil & Gas Sector (39.5%) as well as foreign currency loans is rather disturbing given that there should have been a structure in place to checkmate uncontrolled exposure to any sector.

Obviously, FBNH needs to overhaul its credit risk management framework as well as review maximum sector allocation to forestall future occurrence. Given the overall outlook of the economy, loan growth is expected to stay modest across the sector, our view is that FBNH will be fixated on improving risk management structure for most of 2016 thus loan growth may be flat or contract

TSA Implementation Leads to Contraction in Deposits
TSA implementation which led to the withdrawal of large institutional funds as well as CBN’s restriction on cash deposits to domiciliary accounts in 2015 pressured total deposits which contracted 3.3% to N3.1tn in FY:2015, slowing further in Q1:2016 by 2.6% to N3.0tn.

Thus, total liabilities declined 6.1% Y-o-Y settling at N3.6tn. Deposit growth may be constrained further in 2016 as poor fiscal and monetary policy responses to recessionary pressures in the economy weaken retail deposits while competition for cheap deposits heightens.

Nonetheless, the Group stays well capitalised with a Capital Adequacy Ratio (CAR) of 17.1% as at FY:2015, slightly above 16.0% benchmark for Systemically Important Banks (SIBs) in the country.

Rating: Performance to be Pressured by Weak Asset Quality, We maintain our REDUCE” Rating
Against the backdrop of weaker loan growth outlook as driven by unrelenting pressure in the overall macroeconomic environment, we updated our valuation assumptions for FBN Holdings, using a blend of absolute and relative valuation methodologies.

Although we expect the Group to tighten its credit risk management framework going forward, we do not expect this to bring about a significant improvement in its performance metrics in 2016. We are of the view that sentiments on the share price will remain weak in the short to medium term given that indication from the Q1:2016 numbers showing similar trend with that of FY: 2015.

Thus, we imagine that investors will stay wary of the stock until earnings scorecards begin to indicate positive changes.

On the basis of the foregoing, we review our target price for FBNH to N3.25/share (implied P/E and P/BV of 4.6x and 0.4x respectively) from previous N3.88/share. Compared to market price of N3.57, P/E and P/BV of 7.9x and 0.2x as at 27/04/2016, this indicates a downside of 9.1%.

Thus, we maintain our “REDUCE” rating on FBNH Holdings.

-Afrinvest Research