FBN Holdings’ (FBNH) rich history and the critical role the bank has played in both financial inclusion and intermediation precipitated the need for a performance assessment report. Moreover, the present blurred lines created by the banks financial performance reinforced the need to critically analyse its numbers for the financial year 2016.
An Economic and Sectoral Overview
Nigeria in 2016 slipped into recession, largely as a result of reduced oil prices, oil production and foreign exchange earnings. The business community was however able to stimulate the economy, though at a slow pace. Following the contractionary monetary policy stance of the Central bank, the economy witnessed increase in interest rates and an introduction of a flexible exchange rate regime while inflationary pressures mounted.
The various macroeconomic challenges faced in this period weakened the stability of financial system. This combined with the dampened appetite for risky assets and the large exposure to the oil and gas sector put considerable stress on the banking system, as banks were forced to cut down on their operating expenses. In a bid contain the risks to financial stability; banking supervision tightened and dividend payments & bonuses was prohibited for banks with high level of non-performing loans.
FBNH stable through the tides
In terms of scale, whether it is book value or loans & advances or customer deposits or total income or branches network or employee base, FBNH is either second largest or third largest bank in Nigeria. However, primarily due to weak loan book and lower profitability, FBNH is currently positioned a bit low in the overall banking sector.
Our analysis showed that the bank’s market position was largely retained given FBNH’s deep customer deposit of N3.093trillion and a book value of N602billion. The amount of N2.063trillion in loans and advances justifies the bank’s inclusion among the tier 1 banks. Evidently, most of the banks risk parameters have tilted upwards which was reflective after the 2016 financial horizon. FBNH’s capital adequacy ratio sharpened slightly from 17.9% to 18.1% though it remained the bank with lowest capital adequacy ratio among the Tier 1 banks. Regardless, it is relatively higher than the banking sector’s common equalization of 13.1% and higher than most tier 2 banks.
The jolt in FBNH’s long term borrowing partly due to devaluation when compared to a tepid increase in equity triggered an outward cave in its gearing ratio from 54.4% to 64.6%; interestingly, the lowest gearing ratio among its peer. The report thus admits that the capacity to hewn revenue as a growth tool by the holdco is not in doubt given the fact that it declared the highest pre-provision operating profit in the sector.
FBNH’s consistent strong yield on its interest earning asset has contributed to its rate of revenue accretion and do share a positive correlation with its net interest margin. Post mortem carried out during our analysis further showed a crippling in FBNH’s operating profit steaming from the increase in the bank’s non-performing loans (NPLs), as the NPLs of the bank rose to 24%. The crippling in operating profit from 19% to 3% portrays the weight of credit losses on the bank’s revenue at the end of 2016.
FBNH’s 75% loan concentration in the oil sector made its loan portfolio have a relatively thin deviation while it appears more rent focused. The causation of a negative anti-clockwise movement in oil price on the quality of its asset was inevitable. This placed FBNHs as the bank with the highest quantum of non-performing loans among tier 1 banks. Thus, the fallout has been a relatively weak loan yield, erosion in asset quality and an escalation in risk. The presence of high cost of risk and the loan to deposit ratio of 66.7% has reduced FBNH’s headroom for counter cyclical lending. Although loan impairment is a concern, FBNH still tempered down cost to income ratio in a cycle of rising inflation.
Certainly, FBNH’s blistering in NPL is a form of penalization by the macro end due to both the twist in cycle and structure of the bank’s loan portfolio and thus the management has been forced to embark on a budget repairing. The overall ripple effect was slimmer margin of safety and tepid return on asset.
FBNH’s financial performance in Q1 2017 recorded a catapult in operating profit from 3.9% to 14%. The healthier performance is as a result of improved macro activity and a more aggressive approach towards loan recovery.
Finally, the report highlighted that the cost to income ratio and cost to deposit are on the up rise while it also carried out a recall on the macro environment and a comparative analysis of the banking sector.
While we understand that Financial Institutions are not immune to global and domestic economy shocks, as this tend to affect both the ability to operate as well as the asset quality of banks; we believe FBNH can do more by:
· Improving its Capital Adequacy (both Tier 1 and Overall)
· Focusing more on Non-interest Income than Interest Income in 2017
· Improving Asset Quality and Avoid High Specific Sector Concentration
· Rationalizing Operating Costs and
· Leveraging Technology More to Manage its Operations