FBN Holdings Plc

FBN HOLDINGS PLC

Ticker:                            FBNHNature of Business:    Other Financial InstitutionsLocation :                              Nigeria
Recent Price:           NGN7.35     52-Week High/Low: NGN9.00/4.50Estimated Fair Value:      NGN13.30-NGN17.20
Expected Return:      53.5%Consider Buy:                   Below NGN13.30Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Average

Company Overview
As a foremost financial institution in Nigeria, FBN Holdings Plc (FBNH ) is extending the frontiers. With a presence in 10 countries spanning 3 continents, FBNH’s array of services includes banking, asset management, capital market operations, insurance brokerage and trusteeship. The company, a market leader, boasts of over 800 business locations and over 3000 ATMs. Its total assets and shareholders’ fund are in excess of NGN7 trillion and NGN700 billion respectively.

FBNH began its journey in 1894 as a branch of Bank of British West Africa Limited (BBWA). Later, it was renamed “Standard Bank of Nigeria”. In 1979, it adopted the nomenclature “First Bank of Nigeria”. It restructured its operations in line with the directive of the Central Bank of Nigeria (CBN) which required banks to divest from non-banking financial activities. Consequently, FBN Holdings Plc was established in 2010; the subsidiaries of FBNH include First Bank of Nigeria Limited, First Pension Custodian Nigeria Limited, FBNQuest Asset Management Limited, FBNQuest Capital Limited and FBNQuest Trustees Limited. It sold its stake in FBN Insurance Limited in June 2020 and made a profit of NGN10.5 billion from the sale.

Remi Babalola replaced Oba Otudeko as chairman of the board of directors in 2021 while Mr. U.K. Eke retained his position as Group Managing Director of the company. The new directors of the company, appointed in 2021, are Fatade Oluwole, Kofo Dosekun, Remi Lasaki, Alimi Abdulrasaq, Ahmed Modibbo, Khalifa Imam and Peter Aliogo.

Investment Thesis
FBNH has upgraded its technology infrastructure in order to cut down its costs and remain competitive in the digital economy. In addition, it has continued to introduce innovative products such as FastTrack ATM, FirstBank Virtual Payment Card and Firstmonie Agent Credit. First Bank of Nigeria Limited, the flagship operation of FBNH, has over 30 million customer accounts. Commercial banking accounts produce over 90% of revenue. FBNH used the proceeds of NGN10.8 billion made from the disposal of FBN Insurance Limited and Twin Peaks Nigeria Limited to shore up its capital.

The quality of its loan portfolio has dropped owing to the accumulation of low-quality loans. Only about 24% of its gross loans to customers have low default risk. On average,14.4% of gross loans have been in default over the past three years while 61.6% have high default risk. Provision for loan impairment dropped from 18.6% to 3.2% between 2018 and 2020. We are of the opinion that this may be grossly inadequate going forward considering the composition of its loan portfolio and the aftermath of the Covid-19 pandemic.

Retail banking customers have limited access to credit. FBNH needs to take advantage of the growing retail market in order to improve its earnings and profit margins. The company should expand its loan portfolio, especially to the retail end of the market to impact revenue and profit positively. Also, it should work hard to grow cheaper sources of funds.

Currently, FBNH trades below its intrinsic value ranging from NGN13.30 to NGN17.20. We maintain a hold recommendation in the light of current realities. We will keep tabs on the company to see how the newly constituted board improves the company’s asset quality and capital.

Valuation
FBNH has an adjusted Earnings Power Value of NGN10.50, average Book Value Per Share (BVPS) of NGN15.60. The average Price/Earnings (P/E) ratio is 6.1 times while it has traded close to 0.7 times book value. A share of  FBNH is worth between NGN13.30 and NGN17.20. We expect FBNH to generate a return of 53.5%.

Financial Overview
FBNH made gross earnings of NGN579.4 billion in 2020, representing a 1.9% decrease over the previous year.  This was, to a large extent, caused by a 10.9% drop in interest income. Net interest margin lost 3.9% to close at 43.4% at the end of the 2020 financial year. Fee and commission income rose by 9.5% to NGN113.2 billion. A rise in non-interest income and a fall in interest expense were responsible for a leap in operating profit from NGN75.2 billion in 2019 to NGN83.2 billion in 2020. Therefore, the operating profit margin went up by 1.6% or 160 basis points. Profit Before Tax (PBT) and Profit After Tax (PAT) jumped by 11.2% and 21.8% respectively compared to an increase of 15.3% and 23.5% in the preceding year. PBT margin was 14.5% (2019:12.8%) while PAT margin stood at 15.5% (2019:12.5%).

Gross loans extended to customers expanded by 18.7% while the loans to deposit ratio was 46.8% compared to 48% of the previous period.  Corporate customers got 91.8% of total loans compared to 92% of the earlier year. NGN189.2 billion or 8.3% of gross loans were in default in 2020 compared to NGN196.8 billion or 10.2% of gross loans in 2019. A further 67.5% of loans were at risk of not being settled as and when due. (2019: 63.4%). However, allowance for loan impairment has been declining. The allowance for loan impairment fell to 3.2%, from 4.1% in one year. The loan loss provision on corporate and retail loans stood at 3% and 6.3% respectively at the end of the year 2020.

Deposits from customers grew by 21.8% year-over-year due to strong growth in both current and savings deposits. Current deposits were NGN1.5 trillion, 43.9% better than the previous year’s figure. Savings deposits gained 36.1% to NGN1.8 trillion. Term deposits accounted for 19.2% of all customer deposits while current deposits were 30.8% of total customers deposits.

Equity formed 10% of total assets and increased at a 3-Year Compound Annual Growth Rate of 4.3%.  Debt was 49.6% of shareholders’ fund and 4.2 times PAT. FBNH is liquid and has a manageable debt level.

Earnings Per Share (EPS) jumped to NGN2.5 from NGN2.0. There was a remarkable improvement in BVPS; BVPS surpassed its 11-year average of NGN15.6. Return on Assets (RoA) remained low while Return on Equity (RoE) deteriorated by 5.1%.

Business Risk
There is no marked product differentiation because of the nature of the industry. This means that earnings are vulnerable. Competitive and regulatory pressures could drive down interest income and net interest margin. Besides, the global economic environment will impact its expansion drive and the profitability of its foreign subsidiaries.

Recommendation: Hold

Earnings Chart of FBN Holdings Plc

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