FBN Holdings Gets Buy Rating Amid Asset Quality Issues

By Dipo Olowookere

A Buy rating has been assigned to FBN Holdings by analysts at United Capital Research.

The rating is coming on the back of the recently released financial statements of FBN Holdings for 2018.

In the results, the gross earnings declined by 2.0 percent to N585.9 billion as a result of a 7.5 percent decrease in interest income to N434.4 billion amid weaker loan growth and earnings yield.

However, the PBT and PAT jumped 19.7 percent and 31.4 percent to N65.3 billion and N59.7 billion respectively, proposing a final dividend of 30 kobo, which translates to a 3.5 percent dividend yield.

According to United Capital Research, FBN Holdings’ gross earning underperformed estimates for the period amid sustained reluctance to expand its loan book which shrank 7.2 percent to N2.5 trillion over the period.

It said clearly, the bank continues to favour the deployment of funds to investment securities which jumped 33.3 percent y/y to 1.7 trillion and was unable to rescue interest income as moderation in yields environment and poor loan growth dragged earnings yield.

The lender however, reported marked improvement in non-interest income which surged 18.2 percent y/y to N151.2 billion, thanks to fee & commission income which jumped 24.5 percent y/y to N92.7 billion.

Notably, loan loss expense fell 42.2 percent to N86.9 billion, driven by net recoveries on loans previously written off.

“However, we will be waiting on management to provide some guidance on the position of the Atlantic energy loan during their conference call towards the end of the month.

“Overall, improvement in loan loss expense buoyed bottom line numbers as PBT and PAT rose 19.7 percent and 31.4 percent y./y to N65.3 billion and N59.7 billion respectively,” the firm said in its report.

It was further stated that ROE, ROA and Net margin all improved to 9.9 percent, 1.1 percent and 10.2 percent respectively, however, CIR worsened to 63.4 percent from 54.0 percent despite the effort to streamline OPEX by the management.

Also, Net interest income margin weakened to 7.5 percent from 8.4 percent as Interest expense rose 8.8 percent while Cost of Funds stayed flat at 3.4 percent, thanks to an 11.4 percent jumped in deposits.

It was emphasised that FBN Holdings’ asset quality remains a big challenge with NPL ratio at 25.9 percent from 22.8 percent in 2017.

Additionally, liquidity, capital ratios appear to be under pressure as liquidity ratio reduced to 45.2 percent versus 49.3 percent of the previous year and CAR (FBN Ltd) inched lower to 17.3 percent from 17.7 percent.

United Capital Research noted that outlook for FBN Holdings’ performance going forward is hinged on a resolve to expand its loan book and sweat its N5.6 trillion balance sheet. It said the yield on government securities is not expected to rise above current levels.

“Accordingly, we imagine that FBN Holdings will review its recent stance on loan growth. Also, management has to deal with the issue of OPEX, Asset Quality and Pressure on Capital.

“Given the foregoing, we maintain a cautious outlook on the performance of FBN Holdings. Nevertheless, the current price of N7.50k per share translates to a PB ratio of 0.5x compared to peer average 0.9x, as such, we retain our BUY rating on FBN Holdings,” the report said.