Stock Analysis: FBN Holdings Gets ‘Hold’ Rating After Weak Performances

By Modupe Gbadeyanka

Not too long ago, FBN Holdings Plc released its earnings for the first quarter of 2018, however, the firm recorded weaker than expected performances across most line items.

Particularly, the gross earnings moderated 2 percent y/y to N139 billion – weaker than prior quarter’s N154 billion and the N153 billion estimate of Vetiva Research.

The unconvincing top line performance was driven by weaker than expected performances from both Interest and Non-Interest Income lines.

Whilst Non-Interest Income rose by a marginal one percent to N23.6 billion, the income line was 27 percent and 40 percent lower than the N32.4 billion estimate and prior quarter’s N39.5 billion.

According to analysts at Vetiva Research, Interest Income moderated 3 percent y/y and 2 percent q/q to N111 billion – missing the N120 billion estimate.

With Interest Expense coming largely in line with our estimate at N35.2 billion, Net Interest Income was down 6 percent y/y to ₦75.7 billion (below our N85.5 billion estimate).

In line with the trend observed across most banks in Q1’18, we had expected the implementation of IFRS 9 to result in a significant one-time write off from earnings at the beginning of Q1’18 and a more tempered loan loss provision for the period.

However, the initial application of IFRS 9 resulted in a more contained charge of N36.1 billion versus the average N95.5 billion recorded by other tier-one banks.

Consequently, FBNH reported a loan loss provision of N25.3 billion versus our N11.1 billion estimate. With this, Operating Income came in flat y/y at N74 billion – albeit significantly weaker than our N107 billion estimate.

Furthermore, with Operating Expense coming in at N55.2 billion – better than our N64.9 billion estimate, PBT was down 6 percent y/y to N18.8 billion – significantly missing our N41.9 billion estimate.

Overall, PAT was down 9 percent y/y to N14.8 billion – behind our N35.2 billion estimate. TP revised to N12.82 (Previous: N15.88).

We have revised our estimates across most line items to reflect the earnings miss. Most notably, we raise our loan loss provision to N121 billion (Previous: N44.3 billion) following Q1’18 trend and in line with management guided cost of risk of 6.0 percent.

Also, with the one-time write-off coming in lower than we had expected, we raise our loan growth forecast marginally higher to 3 percent (Previous: 0 percent).

Despite this, we cut our Interest Income estimate to N449 billion (Previous: N481 billion) following weaker than expected Q1’18 run rate.

Similarly, we revise our Non-Interest Income estimate lower to N110 billion (Previous: N130 billion). Hence, we revise our Gross Earnings estimate to N550 billion (Previous: N610 billion). With Operating Expense coming in 15 percent better than we had estimated for Q1’17, we lower our Operating Expense estimate to N218 billion (Previous: N250 billion) – translating to a cost to income ratio of 53 percent.

Overall, we revise our PAT estimate lower to N58.3 billion for FY’18 – translating to an EPS of N1.62.

Consequently, our Target Price (TP) is revised lower to N12.82 (Previous: N15.88) – FBNH trades at FY’18 P/B and P/E ratios of 0.6x and 7.7x vs. Tier I averages of 1.0x and 4.7x respectively.