Analysts Foretell Imminent M&A after FBN Holdings Board Changes
FBN Board changes has continued to generating reactions as breakdown in governance code came as surprise to industry’s analysts, especially investment bankers who found the board room game dirty.
Reacting to the recent change by the Central Bank of Nigeria, Chapel Hill Denham said it has raised its risk-rate on FBN Holdings, noting that merger and acquisition (M&A) is actually possible in the near term due to the dirty board room game that backfired on disengaged Board members.
In the next 12-18 months, analysts at Chapel Hill Denham opened up that M&A is possible given the weaknesses in the capital adequacy ratio and non-performing loan ratios, in breach of acceptable prudential standards of the CBN.
Following the removal of Dr. Adesola Adeduntan by the Board without due process, the CBN then dissolved the boards of FBNH and First Bank of Nigeria Limited (FBN).
Recall that in a press briefing, Godwin Emefiele, the CBN governor announced the dissolution of the boards of FBNH and FBN and the reinstatement of the CEO of FBN, Dr. Adesola Adeduntan.
The apex bank also announced appointment of the new Chairmen of the boards of FBNH and FBN – Mr. Remi Babalola and Mr. Tunde Hassan-Odukale, respectively.
The CBN considers itself as a key stakeholder in management changes at FBN due to the forbearances and close monitoring by the bank over the last 5 years, which is aimed at taming the slide in the going concern status of FBN.
Notably, the removal of Dr. Adeduntan, whose tenor expires in December 2021, by the board of FBN was without CBN’s approval as key disclosures by the CBN point to credit and corporate governance concerns.
The CBN’s target examination as of December 2020 revealed that insider loans were materially non-compliant with the terms of restructuring put in place by the bank and CBN in 2016.
The issue unveiled the management’s non-perfection of lien on shares and collateral arrangements that the CBN had insisted on for over three years are key examples.
It was noted that FBN has also not divested from non-permissible holdings in non-financial entities in line with regulatory directives.
FBN invested in Airtel Nigeria Limited and Honeywell Flour Mills (5% holding) and Honeywell Flour Mills was given a 48-hour ultimatum, effective 26 April, to repay its obligations to FBN.
Is it likely that we see M&A activity in the bank in the next 12-18 months?
“We think this is possible given the weaknesses in the capital adequacy ratio (CAR) and non-performing loan (NPL) ratios, in breach of acceptable prudential standards of the CBN.
“We highlight that, in the history of the banking sector, there have been issues relating to credit and corporate governance that eventually resulted in mergers and acquisitions for a stronger financial system”, Chapel Hill Denham stated.
The investment firm said FBNH’s Q1-21 results are materially behind its expectations for financial year 2021. Gross earnings declined by 14.5% year on year in Q1-21 in contrast to 2021 forecast growth of 19.0%.
Notably, analysts said the 25.3% year on year fall in interest income resulted in 12.4% year on year decline in net interest income, despite the 25.3% drop in interest expense.
Accordingly, annualised EPS dropped by 32.5% year on year against Chapel Hill Denham financial year 2021 forecasted growth of 0.8%.
It was noted that lender’s impairment charges rose by 35.7% year on year to N13.17 billion in Q1-21 with the NPL ratio falling to 7.9% (9.2% in Q1-20 and below 2021 forecast of 8.5%), albeit breaching CBN’s prudential standard of 5%.
Analysts at Chapel Hill Denham downgrade the rating on FBNH Plc. to a HOLD for lack of upside potential from a Buy recommendation and the 12-month target price dropped to N6.96 from N9.95.
Explaining the rating action, Chapel Hill Denham said the downgrade is partly reflective of the weak Q1-21 results and the upward adjustment of its risk-free rate to 12.0% from 10.5% previously.
The investment firm said FBNH is currently trading on 2021 return on average equity and price to book ratio of 8.7% and 0.3x against the sector average of 7.5% and 0.6x respectively.
In its contribution, Meristem Securities Limited said considering the systemic importance of FBNH in the Nigerian financial system, the firm supports the decisions of the CBN in upholding the prevalence of strong Corporate Governance in the company.
“We believe the CBN’s decision is in the best interest of the bank, the shareholders, depositors, and the economy at large”, it added.
In the near term, analysts at the firm said they expect negative investor sentiments on the ticker given the recent turn of events, which would trigger a decline in its price.
It noted that during intraday trading on Friday, FBNH’s share price fell by as much as 9.42%, although the ticker ultimately closed flat at NGN6.90.
“We however expect the negative sentiment to be a temporary reaction which would correct over time, given that we do not expect these events to have a material impact on the bank’s fortunes”.
Meanwhile, analysts said they have placed the target price for FBNH under review, given its lower-than-expected Q1:2021 performance.
The First Blip on the Regulator’s Radar
Meristem Securities limited said the events also draw on First Bank’s troubled history from 2016, where it fell substantially short of prudential thresholds.
“Between 2016 and 2018, the bank’s Capital Adequacy fell to 10.66% (on full application of IFRS 9 transition), while its Non-Performing Loan Ratio hit 24.40%, due to lax credit decisions taken by the lender – a position which was further worsened by the oil crisis of 2016.
“Interestingly, in relation to this case, information from the CBN also show that a credit facility extended to an insider also contributed to the bank’s deteriorating asset quality.
“Although the bank had made significant strides in cleaning up its balance sheet, it had yet to comply with regulatory directives from the CBN regarding restructured credit facilities granted to the insider”, Meristem Securities explained.
It added that this was highlighted by the CBN in its circular where it indicated that the FBN was yet to perfect the lien on the shares of the insider in FBNH which were used to secure loans granted to Honeywell Flour Mills Plc despite several reminders.
Furthermore, the CBN highlighted the bank’s failure to comply with several directives to divest from non-permissible equity investments, which included its holdings of Bharti Airtel and HONYFLOUR.
Analysts Foretell Imminent M&A after FBN Holdings Board Changes