FBN Holdings Plc: Reinvigorated to unlock value in Q2;17

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Strong revenue growth in FY’16, continues in Q1’17: Gross earnings increased by 15.7% YoY to N581.8 billion in FY’16.

This trend continued in Q1’17 as revenue grew by 31.2 YoY to N141.0 billion. The top-line performance in Q1’17 was supported by the marked growth (36.7%) in interest income, buoyed by strong fixed income yield.

Despite the stellar performance in topline (+31.2%), the rise in impairments (+126% YoY) and the surge in interest expenses (+82.5% YoY) significantly depressed earnings (-22.3% YoY) in Q1’17. Though impairments were higher YoY, we saw a significant moderation QoQ (down by 74.5%) in Q1’17.

Non-performing loan ratio deteriorated to 26.0% in Q1’17 from 24.4% recorded in FY’16, as the bank reclassified a major credit asset in its UK subsidiary. Coverage ratio however improved to 58.8% in Q1’17 from 40.2% in Q1’16.

Despite the high impairments and NPLs, capital adequacy ratio for the banks remains well above regulatory limits, rising to 18.1% in Q1’17 from 17.8% in FY’16.
Lower impairments to boost profitability in H1’17: We expect interest income to rise by 34.9% YoY to N228.3 billion in H1’17, driven by our expectations that yields on government securities will remain elevated during the course of the year.

After adjusting for FY’16 revaluation gains (N52 billion), we anticipate a decline of 35.3% YoY in non-interest income to N61.6 billion in H1’17.

Overall, we expect gross earnings to rise moderately by 8.2% YoY to N289.9 billion. Excluding FY’16 revaluation gains, gross earnings would have increased by 32.4% YoY. We expect impairments provisions to moderate by 8.5% to N64.0 billion in H1’17 – given the very high provision levels in H1’16.

We expect operating expenses to increase rise by only 7.5% (slower than inflation) given the bank’s enhanced cost control measures.

Finally, we project that after tax earnings would rise by 3.0% to N37.0 billion with ROE and ROA improving to 12.2% and 1.5% respectively.
BUY rating maintained: We retain our target price for FBNH at N7.34, implying a 25.0% upside at current price of N5.87 – hence we retain our BUY rating on the counter. Our valuation is premised on the assumptions that profitability and earnings will start to trend upwards, as we expect impairments to decline significantly going forward.

Following the aggressive clean-up of NPLs as well as the improved economic outlook especially for the upstream oil sector, we expect the resultant moderation in provisions to unlock the expected valuation upside.

FBNH is currently trading at a P/B of 0.4x which is at a significant discount to peer average of 0.8x and Middle East average of 1.1x.

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