FBNH targets single digit NPL, says it has flexibility to grow loans

FBNH targets single digit NPL, says it has flexibility to grow loans

By confronting its margin-dilutive legacy issues frontally, First Bank of Nigeria holding (FBNH) Plc has been able to raise overall performance across the board, its recent result has shown.

Based on its strategic planning program for the year, management said that analysts should expect a cleaner and stronger balance sheet as legacy issues will end in this year.

Beyond its immediate results, long term sustainability is strategically imperative to future profit performance, and its investment in IT infrastructure is the way to go, consultants at LSintelligence said.

According to data available from Nigerian Stock Exchange, FBNH’s profit for the first half pitched at about N32 billion, which was 5% down when compared with the first half of 2018.

FBNH targets single digit NPL, says it has flexibility to grow loans

The record shows that the group recorded an improvement in assets quality thereby reducing the amount of impairment charge booked or taken through the income statement as non-performing loans, NPL, nosedived to 14.5%.

It would be recalled that FBNH’s strategic planning program for the financial year 2019 is anchored on three pillars which include asset qualities, enhancing revenue generation and also improving balance sheet and operational efficiencies.

Now, the NPL ratio has dropped to 14.5%. The management reiterated that FBNH is on a cause to deliver the single-digit NPL ratio by end of the 2019 financial year.

This will be through recoveries, restructuring, write-offs and new loans to be created. Again, we will continue to maintain best-in-class risk management practices.

“I think the biggest news of the quarter is the fact that we are seeing improvements, massive improvement in the asset quality with the big elephants in the room, our Atlantic Energy now fully written off”, the management said.

Over the years, FBNH has been underperforming its peers in the banking sector. An insight into the holding performance shows that in the past 10 years, FBNH has been able to grow gross earnings by 8.57% annually.

Up till the end of 2018, FBNH’s total assets grew by 9.52% on average in a decade. Customers’ deposits ballooned at an average of 9.68% per annum, while pretax profit grew by 15.64%.

Before the release of the first-half scorecard, the non-performing loans ratio was locked at 19.8%, which means that for every N100 in gross loans, some one-fifth faces outright default.  This was the case despite the fact that the group’s net loans has declined.

FBNH stated that “The write-off of Atlantic Energy provided great significant headroom for us to increase our exposure in the very lucrative oil and gas sector, where we’ve been shut out effectively over the last 3 years”.

Discussion around various impacts of the CBN’s recent regulations, the cost to income ratio, capital adequacy as well as its dividend plan took centre stage at the analysts’ financial result conference call.

Analysts deep dived into the holding’s performance scorecards, guidance and business-related issues among a myriad of other factors.

On top of the lists were enquiries as to the group’s interest in oil and gas-related deals with specific mention of Sterling Oil, Green Energy and Seplat financing, none of which FBNH participated in as management insisted on cleaning the balance sheet.

“We did not participate in Sterling Oil, Green Energy and SEPLAT. Because at the time those deals were on, we were balancing the portfolio”, Urum Kalu Eke, the Group Managing Director said.

On assets quality and drivers of operating expenses, Urum Kalu Eke, the Group Managing Director, FBNH Plc said that the leading financial institution has the flexibility to grow loans when analysts raised issues around capital adequacy position and availability of funds in the light of CBN loans to deposits ratio.

Apart from that, some analysts requested to know how the group intends to balance assets allocation between fixed interest rate instruments and loan bookings in relation to the financial year 2019 guidance.

Analysts asked that now that FBNH has written off Atlantic Energy, it is going to increase your loans as a proportion of your deposits to get to that 60%.

The analysts noted that FBNH’s capital adequacy ratio looks quite tight and wanted to go through how management can increase risk-weighted assets and still manage the capital adequacy ratio at the same time bearing in mind that the  Holdings’ have additional IFRS 9 charges coming in at the end of the year because of that amortization of the IFRS 9.

Eke said, “If we start with the contribution around the loan deposit ratio, really two things are there. You’ve got the loans you need to grow. You also have the deposits you need to deal with”.

“We do plan to grow loans this year and to close this gap; we need to let that N200 billion in loan growth this year, which we can do. We also have core flexibility to handle our purchase firms as we choose to.

“Between those two, we don’t require more than 0.5% capital adequacy to achieve. So that’s the first beat”, the GMD said.

He stated that the second beat has to do with the amortization of the IFRS 9 transitional adjustment. On the last call, we had explained that we do have a lot of amount of capital, reinvested, as part of the –liquidity-risk reserve.

“If we do achieve our loan cleanup and plan this year, that amount of capital should be available for the deal. That’s likely key task for that transitional adjustments and that will become what would come up at the end of the year.

“Some more things: we are creating profit organically. In the half-year, we’ve done about N33 billion in the bank. We expect that to be sustained in the second half of the year.

“But you may recall, we gave guidance around loan growth. So if you walk back from that and tie that to what I just said, our CAR is in a good place”, The Group Managing Director, FBNH Plc said.

Oyewale Wale Ariyibi, FBN Holdings Plc – CFO said, on the Loan to Deposits Ratio issue that the guideline made provision for retail, consumer and SME barriers, which are at 150%.

“If you look at our books today, our size of SME loans, retail and consumer is about 11%, 12%. Risk weighting that 150% will give us a good number.

“So we don’t have to do as much as with the volume, for us to achieve the LDR provision of 60%. As explained, we do have sufficient capital to grow the loans that we ensure that we meet the LDR and still make a lot of money”, Ariyibi added.

Eke while responding to questions on dividend payout and the guidance for CAR, said you would recall that about four years ago, we confirmed that the commercial bank will retain all profits net, so they can reduce capital buffers. And over the last 4 years, they made profits truly and therefore, accrete into their capital.

According to Eke, within this period, the holding company has continued to pay dividends to the ultimate shareholders and has the benefit of having a diversified portfolio of investments, namely the insurance business and merchant bank and asset management businesses.

“These entities remain well-capitalized and very profitable. If you look at the presentation, the insurance business today is the fastest-growing insurance company, the life business, the fastest-growing life business in Nigeria, where I’ve seen nearly 50% return on equity. And on a compounded annual growth rate basis, we are looking at about 45%, 47%, so that is strong, and that did very well.

“So we expect that they’ll continue to upstream dividends to the holding company. We expect that the merchant bank, the Quest group will continue to upstream dividends to the holding company. And it is on point too, the Merchant Bank, Asset Management group, there are a couple of businesses there.

“You have capital. You have trustees. You have asset management, and so on and so forth. So on an aggregate basis; they would remain relevant in the dividend equation for the holding company. So we have no doubt whatsoever that all the issues, legacy issues at the commercial bank will be fully resolved by 2019, and then they’re continuing to upstream dividends back to the holding company.

“But even looking at the half-year, as we have demonstrated, if we capitalize the half-year earnings, you’re going to have 16.8%, which is already above our internal capital adequacy ratio guidance, whereas CBN stays the same, so it’s 150 basis points above regulatory limits for the commercial bank”, Eke stated.

The merchant bank, the CAR requirement is 10%, and they have 13.4% in the first half. So that gives 350 basis points above regulatory limits. We don’t want to run an inefficient balance sheet — or bank rather. At a certain point on this, we are contemplating M&A; need to be careful that we don’t build up higher-than-needed capital buffers.

In his reaction to escalating cost, Patrick Iyamabo, CFO, First Bank of Nigeria Limited & Group Executive said with respect to the human capital optimization, a chunk of that spend was in respect of incentivising a target staff to consider early retirement, and that was funded.

He added that in terms of operating expenses normalization, we still see OPEX being elevated in the second half of this year because we view this year as a — essentially to clean up and ensure that the committed balance sheet structure turns out by the end of the year.

“However, by the second half of the year, we expect our earnings trajectory to continue to improve. And so relative to the first half of the year, we should see a better second half and I think it is safe to expect the cost remained elevated in the second half of the year”.

Oyewale Wale Ariyibi, FBN Holdings Plc – CFO said speaking to the margin environment, clearly, the overall trajectory appears to be that interest ratio will decline, right? However, given some of the recent Central Bank actions, it then suggests that we may be bifurcating the market between what’s available to customers and to banks.

“So it’s a little unclear at this point. We do believe that — it appears that T-Bill rates have bottomed out at about this level. We don’t think the Central Bank is going to encourage them to go much lower than it is. But we need to get a bit more clarity around what rules or what new structure will be imposed on banks as it relates to what we can or cannot do with Treasury Bills or common instruments as the case may be. That is still in flux. But overall, we have seen that rates have come down.

Reacting to analysts’ question that at what point FBN would prefer growing its loan to buying T-Bills, Ariyibi said fundamentally loans will always yield more than government securities. So it’s just really a function of availability. It’s not one or the other.

On whether FBNH is going to return to the Eurobond market, Ini Ebong, First Bank of Nigeria Limited – Group Executive of Treasury & International Banking while reacting to the question said, “You’ll recall that when we went to the Eurobond markets, we went for three reasons. The first was to diversify the funding base; the second, to add in duration, and the third for capital purposes.

Now clearly, given where we see anticipated needs for funding, the developmental needs of the country still suggest that there will be an appetite for firms that have currency financing in the future.

So it will be a combination of a number of things. First of all, what we need. The second would be market conditions and pricing. But important to know that a bank like us, where we still have access to financing and across a number of options beyond just the Eurobond market, so we look at all of them, and it just depends on what is optimal for us, and then we’ll see to track.

On the group’s ballooned operating cost, the management said, “We believe that we have a clear focus on the cost drivers. We understand what is driving the cost. If you imagine the investments we’re making on digital platforms.

“And also the fact that we had to make some payments related to legacy AMCON issues, on our accounts we transferred, also on account of the growing balance sheet size, our elevated regulatory costs and also some costs that within one-off brand-related costs we incurred during the period under review.

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“But clearly, we believe that the investments we are making are important for future growth. We believe that the sustainability of our business is important. And we believe that we don’t have to sacrifice efficiency on the altar of immediate profits; that is what is driving our investments in organic channels”, FBNH stated.

“That said, we believe that even as we absorb these costs to the income statement now, the incremental gains that will come through enhanced revenue in the second half of the year and the subsequent periods will justify the investments we have made that are creating this high-cost base.

I think it’s also important to highlight the fact that Central Bank gave us the approval to commence the group share services, and the commercial bank is the centre of excellence. Therefore, they will provide support services to the other credit entities. And this investment translates to cost at this time”, management said.

FBNH targets single digit NPL, says it has flexibility to grow loans