FBN Holdings: Can it sustain recovery?

FBN Holdings reversed a two-year drop in profit at the end 2017 and lifted profit by 233% to N40 billion in the year. That still leaves the bank a long way to full recovery to the peak net profit figure of over N84 billion it posted in 2014. Will progress be sustained towards recovery with a disappointing first quarter is the question mark on FBN Holdings in 2018.

Revenue performance was weak in the first quarter and the constraint cuts across all the key earning lines of the bank. Gross earnings went down slightly year-on-year to N139.40 billion with interest income leading the decline.

Revenue performance was equally weak last year with only a marginal improvement of 2.7% to about N598 billion at the end of the year. Interest income provided the revenue growth force in the previous year as non-interest income dropped. This year the weakness in earnings cuts across interest and non-interest income lines.

The weakening interest income seems to reflect a continuing decline in loans and advances to customers from the peak of N2.08 trillion in December 2016 to N1.9 trillion at the end of March 2018. Loans and advances to banks have however more than doubled over the same period to N898 billion.

The strength in earnings needs to improve in the coming quarters to prevent the current year-on-year decline from stretching up to full year. Last year saw the least revenue growth record for the bank in many years and a much stronger performance will be needed in subsequent quarters to prevent a worse record this year.

Costs are rising despite the revenue growth constraints. Against the decline in interest income, interest expenses grew by 4% year-on-year to over N35 billion in the first quarter. This indicates an appreciable increase in the cost of generating a naira of interest income. That resulted in a 5.7% decline in net interest income, which stood at N75.7 billion at the end of the first quarter.

Rising cost of funds reflects a change in the structure of the bank’s principal liabilities in favour of high cost deposits. Deposits from other banks have grown in proportion of total deposits from less than 5% at the end of 2015 to over 17% at the end of March 2018.

Loan loss expenses remain large at over N25 billion at the end of the first quarter despite a 12% drop year-on-year. This is indicating that another triple digit credit loss expense looks likely for FBN Holdings in 2018. Net charge for credit losses amounted to N226 billion in 2016 and N150 billion in 2017. In four years to 2017, the bank has lost more than N521 billion in net credit impairment expenses.

The bank managed to keep total operating expenses flat at N56.4 billion but that still encroached on gross earnings. Operating cost margin increased from 39% in the same period last year to 40.5% at the end of the first quarter. That lowered net profit margin from 11.2% to 10.6% over the review period.

FBN Holdings closed the first quarter trading with an after tax profit of N14.77 billion, a year-on-year decline of 7%. Profit weakness reflects declining revenue against increasing costs and the resulting decline in profit margin. The full year profit outlook is subject to likely changes in the cost and revenue functions of the bank in the course of the year.

Any reasonable progress in sustaining profit recovery this year depends on the ability to cut down on loan loss expenses that have continued to gulp revenue. Having charged so much on loan losses in the past four years, a net write back position should have been expected for FBN Holdings this year. Sustaining profit recovery will also require a step up in revenue growth in order to reduce cost margins and stretch out profit margin.

The bank earned 40 kobo per share at the end of the first quarter, down from 43 kobo per share in the same period last year. It earned N1.21 per share in the 2017 full year and paid a cash dividend of 25 kobo per share on 16th May 2018.