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FBNH: Analysts See Solid Earnings Growth amid Plan to Enter More African Markets

FBNH: Analysts See Solid Earnings Growth amid Plan to Enter More African Markets
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FBNH: Analysts See Solid Earnings Growth amid Plan to Enter More African Markets

Equity analysts have become more optimistic about FBN Holdings Plc.’s performance outlook following a meteoric earnings jump in the financial year 2021, and first quarter of the current year.

FBNH, a diversified financial services group’s earnings beat has raised market expectations, and a slew of investment analysts have upgraded their respective estimates as thebank complete balance sheet cleaning programme.

In the stock market, the financial services behemoth valuation had increased after strategic tranche of shares purchases by billionaire Femi Otedola that follows its leadership tussle last year. Also, investors’ sentiment has improved, as FBNH recorded solid gains in the past few weeks amidst seesaw movement at the local bourse.

In its equity report, CardinalStone Partners revealed that the group which remains resolute about growing organically has plan to expand footprint to three more African countries.

FBNH is currently present in six Africa nations. Consequent to the group earnings beat in 2021, analysts’ expectation about future performance of the bank has improved. This has triggered upgrade to target price, and buying recommendations.

The financial s bolstered earnings performance in 2021 as a result of heavy debt recovery from legacy assets following the group balance sheet cleaning efforts.

Profit tracked higher to more than N151 billion from about N76 billion in the financial year 2020 amidst declining non-performing loan. Key metrics improved accordingly. For example FBNH cost of fund slowdown to 2.1% from 2.3% in the comparable period in 2022.

The group return on equity spiked to 18.4% from 10.6% while return on assets printed at 1.8% from 1.1% in 2020.  Amidst rising optimism that has triggered market interest, CardinalStone analysts upgraded FBNH estimate with positive projection.

FBNH price target was adjusted upward by 29% to N11.52 on expectation of a healthier performance, from N8.96 per share previous set. Anlysts also move the stock from the sell bucket to buy. The higher target price, according to CardinalStone was driven by the expected impact of higher yields on overall performance.

This includes sustained recovery in normalised pre-provision operation profit over the forecast horizon; projected improvement in asset quality ratio; and a potentially lower burden from challenged assets on performance and capital.

FBNH management is keen on changing the narrative following years of underperformance that impaired overall market perception of the bank, according to CardinalStone report.

However, it said FBNH has affirmed that its balance sheet repair is substantially completed and that the asset quality indicators observed in the first quarter of 2022 are reflective of what to expect by the end of the financial year and beyond.

“There is now a warm sense of stability at the board and executive management level following the radical leadership and ownership changes witnessed in 2021.

“In our view, this sense of calm may enable the bank to focus on accelerating strategies that could lead to a complete turnaround in the near to mid-term”.

Analysts explain that FBNH is optimistic it will remain competitive in the dynamic operating environment. The bank plans to continue leveraging its robust retail footprint, expansive digital and agency banking network, and rising pan-African exposure to drive near to mid-term value.

“Despite our concerns over the bank’s capital adequacy which printed below our comfort threshold of 200 basis points + regulatory limit, management prefers to accrete its capital base organically”. Analysts revealed FBNH plans to consider capital market opportunities if there is a need to grow the business much faster than organic capital expansion.

“For now, the firm is comfortable with a 100 – 150 bps capital buffer 5. The bank remains committed to rewarding shareholders as its fortunes improve”, CardinalStone explained in its equity report.

On the estimates, CardinalStone analysts stated that stability at the reins could herald an era of improved performance. Analysts said the rhetoric surrounding the bank’s leadership and management – which stoked some uncertainties in 2021- appears to have been fully contained.

After the dust over Board game settled, Billionaire Investor Femi Otedola, acquired single largest shareholding in the group. His share purchase triggered upward price adjustment in the local bourse, moving market valuation above N400 billion – first time in decades.

“We view the relative calm in leadership positively as it enables the institution to proactively focus on reinvigorating itself to deliver improved value to all stakeholders”, CardinalStone analysts said in the report.

Analysts revealed that FBNH hints about plan to leveraging its differentiated capabilities in digital and retail offerings and expanding its annuity business. Also, it stated that FBNH said it will improve focus on growth and profitability, strengthening collaborations and strategic partnerships with FinTechs and Big Techs.

The group also has plan to continue to driving operational efficiency and deliberately building capital buffers.

CardinalStone also revealed FBHN management aims to expand its pan-African footprint to about 9 countries from 6 currently; and improve the return contribution from its international franchises to about 30.0%. For the financial year 2022, analysts projected that the bank will record its first 30.3% interest income increase year on year in more than four years.

“Our interest income projection is premised on the bank’s sizable interest-earning asset base at about 75.0% of total assets, which has grown 12.7% on a cumulative average annual growth rate (CAGR) in the last four years”.

Analysts also anchored the projection on higher yields following the monetary tightening stance of the CBN. There is an expectation that a higher yield impact on the bank’s funding cost will be relatively contained, given its sustained reliance on low-cost deposits driven by its expansive retail focus.

“Our view on funding cost is further bolstered by the sustained increase in the bank’s low-cost deposit ratio to 82.8% in 2022 from 67.3% in 2015. We believe the consistent rise in low-cost deposits may have driven the 1.6 percentage point moderation in the cost of funds to 2.1%, despite the 10.2% average annual growth rate (CAGR) in total deposits between 2015 and 2021”.

Analysts explained that FBNH is likely to record a material growth in pre-provision operating profit in 2022, after years of sustained decline occasioned by weaker operating income and higher costs. READ: FBNH: Analysts Raise Price Target on Account of Solid Balance Sheet

“While operating expenses will likely remain somewhat elevated in the year, we believe that gains from higher yield and improved contributions from trading and transaction-based income could drive the jump in pre-provision operation profit”, Cardinalstone said.

FBNH has scored an impressive score in balance sheet cleaning which saw non-performing loan ratio declining to 6.6% at the end of first quarter of 2022, from 26% in 2018.  In 2022, FBNH is guiding its NPL ratio to settle below 5% require by the Central Bank of Nigeria (CBN). #FBNH: Analysts See Solid Earnings Growth amid Plan to Enter More African Markets


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