FBNH: Analysts Upgraded Estimates Raise Expectation on Earnings Outlook
An indication of positive outlook on FirstBank Holdings, Chapel Hill Denham has upgraded estimates for 2020 – a positive one following an improved fundamentals.
Ahead of the group third quarter earnings expected to drop in any moment from now, analysts raise is hinged on growth expectations despite the volatile economic environment.
Notably, Chapel Hill Denham expects growth in non-interest income to support the group earnings.
In its equity note, the firm detailed that as at H1-2020, the group non-interest income went up by 46.8% year on year to N80.1 billion.
This was driven by higher fees and commission income and gains in investment securities.
Trading income in the form of net gains in investment securities jerked up 6.4x, due to the significant volatility in the financial markets.
Although electronic banking was relatively flat year-on-year, Chapel Hill Denham said that it remains a strong contributor to non-interest income, accounting for 27.1% as at H1-2020 compare with 40.0% in H1-2019.
Leveraging on robust retail franchise to growth market reach and mobilise low-cost deposits.
According to analysts’ equity note, through FBNH widespread agent banking franchise with over 59,000 as at H1-2020, the bank recorded unprecedented growth in transaction value.
This swelled up 78.3% year on year to N5.7 trillion and volumes went up 37.4% in H1-2020.
FBNH result showed that agent banking contribution to e-banking revenue increased to 29.3% in H1-2020 from 13.9% in H1 2019.
Also, the investment firm considers the bank’s retail franchise as a key driver of its deposit growth.
As at Q2-2020, savings deposits rose to about N1.6 trillion in H1-2020, Chapel Hill Denham said this was the highest in its coverage space.
In total, deposits were up by 8.8% in H1-2020 and low cost deposits represented 87.2% of total deposits.
As a result, funding cost improved to 2.8% in H1-2020 from 3.2% in H1-19. This also led to a 110 basis points (bps) improvement in net interest margin (NIM) to 4.4% compared to 4.1% in Q1-2020.
Continued focus on cost efficiency
Analysts stated that the management has been able to rein in costs despite rising inflation through a combination of cost containment measures, and increased focus remains on innovation and technology to maximise operational efficiency.
This led to a 45bps reduction in cost-to-income ratio to 65.8% in H1-2020 in spite of lower revenues.
However, regulatory costs such as the NDIC and AMCON levy continue to pressure operating expenses.
Nonetheless, analysts at Chapel Hill Denham said they expect operating cost to moderate in financial year 2020.
Impairment charge increase, driven by translation impact on FCY loans
The bank’s impairment charge was up by 38.6%, driven by translation impact on foreign currency (FCY) loans and weak macro environment.
This led to a 60bps increase in cost of risk to 3.1% as at H1-2020 from 2.5% in 2019.
“We expect this trend to continue with 2020 cost of risk forecast to rise to 3.7%”, the investment firm stated.
Analysts however said despite this increase in impairment charge provisions, cover remains precariously low at 49.2%.
“While we expect some improvement in coverage ratio for 2020, the bank is not likely to report coverage ratio close to the 100% confidence level in the medium term”, analysts explained.
Loan growth will remain focused on the real sector
Given the low interest rate environment, the bank adopted a strategy aimed at minimizing vulnerability by focusing on growing short tenured loans.
Loans were up 8.6% year to date and the majority of this growth was due to translation impact of FCY loans, which as at H1-2020 accounted for 49% of loans as against 45.6% in 2019.
Analysts said the bank remains focused on growing its local currency loans, but stricter due diligence policy constraints rapid loan growth.
As at H1-2020, only 15.0% of the loan book had been restructured as against 30% average for peers.
Chapel Hill Denham hinted that FBNH is the only bank within its coverage to record year o date asset quality improvement, despite exposures.
FBNH exposure to sectors oil and gas was 31.1% of loans as at H1-2020, manufacturing – 18.7% and trade, retail and consumer 13.1% of loans as at H1-2020.
First bank had previously struggled with legacy loans, which saw non-performing loan (NPL) ratio ballooning to 22.5% in 2017.
However, with the implementation of its resolution strategy, the NPL figure has trended downwards, settling at 8.8% in H1-2020, a 110bps reduction from 2019, due to its stringent risk framework.
Chapel Hill Denham explained that new stage 3 loan formation was very low and its vintage NPL ratio consistently remained below 1%.
“While this is a positive, First bank’s NPL is well above the CBN’s 5% guidance”, analysts said.
The firm however cited that FBNH during its earnings call, also alluded to polices aimed at pursuing recoveries on loans written-off.
Looking to 2020, analysts at Chapel Hill Denham said they expect the bank’s NPL ratio to remain in the single-digit territory.
Tier 1 capital injection following sale of FBN Insurance Limited:
First Bank completed the sale of its 65% ownership in FBN Insurance Limited to Sanlam Emerging Markets Limited.
Following this transaction, N25 billion was injected into the commercial banking subsidiary as Tier 1 capital, effectively raising the Capital Adequacy Ratio to 16.5%.
This strong capital position provides cushioning for the expected pressure of FCY loans on capital ratios, following the currency devaluation.
It also provides a solid platform for the bank to explore emerging business opportunities. We still expect capital ratios to improve by FY-20E, owing to capital accretion through retained earnings.
FBN returns to the market with a 5-Year Eurobond:
In October, 2020 earnings call with analysts, FBNH announced its plan to issue a 5-yr senior note.
This was a touted as a strategic decision geared towards providing sufficient FCY liquidity (FBNH’s net FCY position stood at about US$450mn as at Q2-2020), given the current FX liquidity challenges in Nigeria.
“We recall that the bank completely exited the Eurobond market in 2019 when it redeemed its US$450mn 7-year Bond due 2021 two years before maturity.
“The timing of this bond is quite apt in our view, given the low domestic interest rate environment – which makes LCY issuance cheaper or at par with FCY borrowing”, Chapel Hill Denham stated.
Analysts at Chapel Hill Denham revealed that the firm maintains BUY rating on FBNH and increase 12-month target price by 20.3% to N9.95.
This translates to an expected total return of 33.4% (capital gain: 28.4% and 2020 dividend yield: 5.2%).
The firm explained that FBNH robust capital ratio at 16.5% with potential to increase with further capital retention.
Also, analysts stated that FX revaluation gains and non-interest income growth should support earnings and capital adequacy ratio in 2020.
It said FBNH management believes the accretive impact of these two income lines will outweigh the impact of naira devaluation.
FBNH: Analysts Upgraded Estimates Raise Expectation on Earnings Outlook