FBNH: Analysts Upgrade Earnings Expectation, Raise Price Target
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FBNH: Analysts Upgrade Earnings Expectation, Raise Price Target

Equity analysts at Cardinalstone Partners Limited are in positive mood with FirstBank of Nigeria Holdings earnings profile with upgrades to its earnings expectation, price target.

At reference price of N5.20 per share, analysts forecasted price target of N7.83 for FirstBank of Nigeria Holding Plc.

This is an upgrade to previous price target set by the equity analysts at Cardinalstone shortly after the second quarter earnings season.FBNH: Analysts Upgrade Earnings Expectation, Raise Price Target

FBNH Plc market capitalisation settled at N222.55 billion on Wednesday after it share price dropped by 5 kobo.

This indicates that investors in the lender share could gain than 51%. With the new bull market on the horizon, it is more likely to see FBNH share price going vertical, and maybe ahead of the projection.

Already, the share price has lifted to N6.20 per share, though it had peaked at N6.30 in the last 7-trading sessions.

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Cardinalstone raised financial year 2020 earnings forecast for FBNH by 8.4% to N84.8 billion, translating to a jump in forecasted return on equity to 12.2% from 11.0% previously.

Analysts explained that the key drivers to upward earnings revision are 6% higher net interest income projections.

Cardinalstone expects this to be supported by regulatory induced cost of funds moderation which, the firm believes, could lead to about N12.6 billion in interest cost savings in the second half of 2020.

A further slowdown estimated at 1.3% in operating expenses as against previous forecast; cost to income ratio now forecast at 66.0% from 68.0% previously as management continues to rein in costs following initiatives introduced in 2019.

“We note improvement in key regulatory indicators as at first half of 2020, which somewhat allay our initial fears”, analysts said.

Firstly, Cardinalstone said although the bank took in higher than expected ECL provisions which drove cost of risk higher by +110 basis points, the firm noted further moderation in absolute NPLs which declined 7.4%, thus led to a 110 bps decline in NPL ratio to 8.8%.

Analysts explained that this may have been due to additional write-offs during the period.

Furthermore, Cardinalstone stated that the recent sale of the insurance business may have given lifeline to the commercial banking arm following the injection of N25.0 billion in tier 1 capital by the parent.

This, consequently, lifted the bank’s capital adequacy ratio to 16.5% from 15.3% in FY’19, and could rise to 18.0% upon FY’20 earnings capitalization and the consequent unlocking of tier 2 capital.

“Adjustment to our estimates suggest a 12-month target price of N7.83, which an upgrade from N7.47, a 51.2% upside to our ref price”, Cardinalstone stated.

In the first half of 2020, lender reported an earnings surged of 56.3% year on year.

The analysis of the result showed that the surge was supported by a 46.8% jump in non-interest income and a N13.8 billion gain in discontinued operations.

This was mostly influenced by the sale of the firm’s 65.0% stake in FBN Insurance Limited in the period.

In the second quarter of 2020, however, earnings contracted by 7.5% quarter on quarter to N23.8 billion.

Cardinalstone’s further assessment reveals a much steeper decline in operating performance after adjusting for the N10.5 billion asset disposal gain during the quarter.

To this point, analysts saw earnings from continuing operations plunged 46.0% quarter on quarter, weighed by a 2.2x jump in impairment charges on financial assets and a 39.0% decline in non-interest revenue.

“These weaknesses are possibly indicative of the weak operating conditions induced by the COVID-19 pandemic”, Cardinalstone said.

Credit-related impairments rose 49.8% quarter on quarter during the quarter to N15.1 billion, which reflected a 100 bps jump in cost of risk to 2.9% in the second quarter of 2020.

Despite all the trouble, lender’s NPL ratio moderated to 8.8% from 9.2% in the first quarter of 2020, analysts said possibly due to further write-offs and loan restructurings,

FBNH’s non-interest revenue (NIR) fell 39.0% weighed by an 84.9% decline in total non-fee related NIR.

Elsewhere, net interest income rose 17.9% quarter on quarter, aided by lower interest expense (-29.5%).

“We attribute the moderation in interest expense to the 100 bps cut in monetary policy rate on the bank’s huge savings deposit base and the impact of moderating yields”, Cardinalstone explained.

Also, operating expenses moderated by 5.6% in the quarter, although cost to income ratio inched 110 bps higher due to the weaker operating income (-7.8% QoQ)

On the lending side, Gross loans to customers contracted by 2.6% while customer deposits improved by 1.9% relative to first quarter of 2020.

Following the divestment from the insurance business, the HoldCo injected tier 1 capital into the commercial bank, leading to a 120 bps increase in capital adequacy ratio to 16.5%.

FBNH: Analysts Upgrade Earnings Expectation, Raise Price Target