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FBN Holdings scale balance sheet repairs hurdle, says won’t grow loan above own risk appetite

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FBN Holdings scale balance sheet repairs hurdle, says won’t grow loan above own risk appetite

First Bank of Nigeria Holdings (FBNH) Plc has affirmed commitment to a single-digit non-performing loan ratio by the end of financial year 2019.

The group asset quality strengthened on the back of efficient resources allocation as impairment charge on credit losses nosedived relative and on absolute term.

Before the management’s balance sheet repair and restructuring program, FBNH had been shackled with heavy loads of toxic assets, high impairment charges which lowered its rating below peers’ in the banking sector.

Meanwhile, the apex bank prescribed 65% loans as proportion of deposit target for banks, but FBNH however said it would grow loans within its risk appetite.

Speaking at earnings conference, U.K Eke, the Group Managing Director said the management has been able to bring down nonperforming loans down to 12.6%, which analysts considered as huge on the back of efficient allocation of resources.

Eke recalled that by December of 2018, FBNH NPL was 25.9% but by June, it sloped down to 14.5% and then 12.6% in September. This happened having write off the big elephant Atlantic Energy account in the course of the year.

“We reaffirm our commitment to delivering the single-digit NPL ratio by year-end. Due to that, the credit impairment charge improved by 62.6% and cost of risk is down from 4.5%, 9 months of 2018 to the current level of just below 2%, precisely 1.9%”, the GMD said.

On the back of the performance, the management reviewed its guidance around key four variables including cost to income ratio, loans and deposits growth, etc. as the leadership affirms commitment to single digits NPL by the year end.

FBNH saw 17% growth in profit before tax, and the buildup of that is the non-interest revenue which went up by 6% year-on-year.

Speaking further on the results, Eke said: “We are fast-tracking our transaction-led model, which we reported as key to us. Also, we have strengthened our electronic banking activities, and you’ll see that year-on-year, there’s an improvement of 45.9%”.

According to him, the increase in electronic banking income relative to the total non-interest income continues to soar; electronic banking contribution to total noninterest income in September 2018 was 25.3%. This time around, it inched up to 34.8%.

Due to decline rate, the group reported margin compression with earnings yield down to 11.2% from 11.7%, net interest margin is also down to 7.3% from 7.7%.

However, the post-tax return on equity (ROE) inched up to 12.2% for 9 months 2019 as against 8.7% in corresponding period of 2018. Also, the post-tax return on average assets also improved to 1.2% relative to what it was last year, 1.1%.

Giving explanation on what spur cost to income ratio, Eke said: “During the first half 2019, we did say that cost-to-income ratio will remain elevated for 2019.  We are reporting increase in cost, and operating expenses; which are related to ongoing strategic projects that have continued to improve our non-interest income”.

“We believe that we are doing the right things when it comes to investments for future growth. Notwithstanding, we believe that we’re going to close 2019 in a very comfortable position.

“We are putting new people, implemented new processes, deployed technology. More importantly, the governance around our entire risk architecture has been significantly enhanced”, the GMD added.

The management guided the market to 58% to 62% cost-to-income ratio but revised it to about 71%.  Cost of risk was revised from 3.5% to 4%.

This is a positive adjustment where we are guiding 2% to 3% because we have done quite a lot of heavy lifting in the first 9 months. Deposit growth, we had also guided the market to about 10%. From what we now see, we are revising the growth rate to about 5%.

Read: https://dmarketforces.com/fbnh-reflates-earnings-as-group-completes-balance-sheet-repair-program/

On loan growth, we had suggested 5% at the beginning of the year; by 9 months, we have done 8.1%, which is above what we have guided. So, we are revising that target to below 10%. All other guidance numbers remain unchanged.

Reacting to the possibility that NPL would surge on loan growth, Segun Alebiosu, the Chief Risk Officer said: “We don’t foresee pressure on NPL. As guided, we are moving towards a single-digit NPL, and we don’t expect this to change”.

The management noted that there are more than one variable that drove down the group non-performing loans in the period.  These include recovery, restructuring and write-off.

Speaking further on FBNH ability to grow loans book to meet 65% loan to deposit ratio target in December giving the group capital position, Alebiosu said for us to grow cash by December to meet 65%, capital is very constrained.

“But what is more important to us is that we are disciplined with cash. We have to grow the loan in line with our risk appetite and tolerance limit. If we have loans, I think that would have been really great. But if we don’t, we will look towards pipeline and see how we make it”.

Alebiosu said: “We will, as a bank, prioritize the fact that we must remain disciplined with free cash. As such, we don’t foresee loan growth to contribute further NPL down the line. Our credit growth has been through telecoms, manufacturing, retail, through consumer and trade”.

“For us, telecoms, if you observe, in 2019, you’ve seen the top two telecom companies coming to the market to raise fund to spend on capital expenditure and expand. That is a lot about their business plan, their growth and their future, and we tried to invest in their future.

“In the manufacturing sector, we’ve seen expansion and government interest in lending to the retail, and we are fair to participate in that because we believe that the future of the country is manufacturing and that the economy will aspire along that”.

In the same vein, Patrick Iyamabo, the Chief Finance Officer First Bank of Nigeria Limited added that the management has a very good handle of costs.

Iyamabo said: “We have a clear distinction between the non-reoccurring and the occurring costs, which are frankly investments for business growth.

“If you adjust for the non-reoccurring costs, we are confident that we can maintain our historical operating expenses growth rate into next year.

According to him, since 2016 to date; increase has been less than 5% average annual growth rate”.

In a swift reaction, Eke said capital is not a constraint; we have a very rich pipeline. Therefore, we are considering all of those requests, case-by-case basis. We have sufficient capital to meet if that were an issue.

“Do we have enough capital to hit 65%? The answer is yes, if we wanted to and if we see very good transactions. We’re not going to sacrifice the loan growth here, that would progressively lead to erosion, if we make the wrong calls”, the GMD stated.

Complementing the GMD, Alebiosu said it’s clear that we did not meet the LDR or LFR, as of September.  The more important being is our plan towards maintaining healthy loan book; and growing loan book within our risk appetite as well as ensuring that we have a very strong balance sheet.

“I mean December is 2.5 months away; it’s our plan to meet 65%, but within our risk appetite. It has to be within our risk appetite. It has something to do with capital, when it is sufficient for us to grow that 65%”, the CRO insisted.

Speaking further on the capital position, Iyamabo said in terms of our capital adequacy ratio (CAR) at the end of third quarter, it was about 15.1%, adjusting for the transition forbearance; it comes by about 10.2%, of which Tier-1-related is about 9.8%. However, we are comforted with the plans we have to capitalize through year-end.

“If we capitalize our earnings by year-end and then we layer on top of that, the Tier-2 rate that is ongoing and will be consummated soon. We are about 17.5%. The portion of the forbearance is going to follow-up about N30 billion, but we also expect to claw back our regulatory risk reserve as our loan portfolio gets cleaned off.

“The transition adjustment gets taken care of by regulatory risk reserve. And between the capitalization of our Tier-1 earnings and the Tier-2 support, we still expect to be about 17.5%. I would describe this as north of 17%”.

Eke while elaborating on capital said: “In 2018, we were at about 17.3% CAR and then second quarter (Q2) loan growth guidance was 5%. We’ve grown about 8%. So, that tells you that our deliberate efforts are increasing the loan book, particularly after we wrote off the big item, Atlantic Energy – we found opportunity to grow.

That mean capital consumption, risk-weighted assets increasing, but it was deliberate, and we have seen the impact of that on the revenue flowing down to the PBT. It was deliberate, which is why we said that we can comfortably get to 17-plus at the end of the year, the GMD said.

Alebiosu however said: “Our risk appetite is targeted at moderate risk, noting the fact that NPLs are lagging indicators. What we’ve done is for us to map our risk. For credit risk, in particular, that impacts so much on NPL, for our target market and try to look at sectors that are less volatile and also reduced concentration.

Iyamabo expects return on equity to exceed 20% over the next three years. By the end of this year, we would have made significant progress with our workforce optimization.

“We’ve made excellent investments in IT and process improvement initiatives, we would have dealt with most of our balance sheet issues, both for loans and non-loans.

“We will have a stronger balance sheet from a funding perspective. Frankly, the things that have shackled us would largely have been dropped off”, he said.

In his explanation, Iyamabo stated that adjusted CAR is about the 10.2% of which, 9.8% of that was Tier 1 related. The management expectation by the end of the year is to be in the north of 17%.

This is going to be a combination of capitalizing retained earnings to boost capital and then consummate ongoing Tier-2 raise efforts to boost CAR.

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