FBN Holdings may post lowest profit in four years

FBN Holdings is growing revenue and losing profit and the profit weakness may result in the lowest profit figure for the bank in four years. The bank retains its leadership in the banking industry by revenue and is expected to close the 2015 trading with well over half a trillion naira in gross income. However it will have to wrestle with UBA and Access Bank this year for it to be able to keep its usual third position on profit. Net profit margin has dropped from 17.2% at the end of 2014 to 12.8% at the end of the third quarter- the lowest profit margin in many years and by far the lowest profit margin among the leading banks.

Growing revenue and losing profit means something is wrong somewhere with the cost profile. Two major rising costs stand in the way of the bank’s earnings track this year and they account for the profit drop in the third quarter. One is provision for credit losses, which advanced by nearly 250% year-on-year at the end of the third quarter to N46.64 billion, already well above the N25.94 billion impairment charges the bank made in all of 2014. Since 2010, the bank has made about N165 billion loan loss charges.

The other hurtful area is interest cost, which grew more than twice as fast as interest income at 35.6% compared to 17.5% in the third quarter. Net interest income therefore recorded a weak growth of 9.3%. The two expenditure lines claimed much of the increase in earnings reported at the end of the third quarter. This explains why the bank grew revenue by 17.2% year-on-year at the end of September but lost 10% of profit.

Revenue growth decelerated from 28% in the second quarter and a further slowdown looks likely for the bank a full year. Based on the growth rate in the third quarter, we mark down our earlier gross earnings projection from N546.7 billion to N525 billion for FBN Holdings in 2015. This nevertheless represents one of the largest revenues volumes among listed companies. That will be an increase of 9.2% over the revenue figure in 2014 but a considerable slowdown from the growth rate of 21.3% recorded in the preceding year.

Compared with a profit growth of 7.7% in the second quarter, the bank reported a drop of about 10% in the third quarter and the full year profit outlook has dimmed. After tax profit improved from N40.06 billion at the end of June to N50.22 billion at the end of September, which is a remarkable slowdown in the growth rate.

Based on the slowdown and the significant loss of profit margin, we revise full year after tax profit projection from N80.6 billion to N67.5 billion for FBN Holdings in 2015. This would represent a drop of 18% at the end of the year compared to an increase of 13.7% in 2014. The bank had raised profit to a new high last year and this year, profit is headed for the lowest figure since 2013.

All the bank’s three main expense lines are on the rise but loan loss expenses and interest cost appear to be out of the control of management. Loan loss expense continues to grow from 239% year-on-year in the second quarter to 250% in the third quarter. A net provision of N46.64 billion at the end of the third quarter was already 80% above the N25.94 billion impairment charge the bank made in all of last year. Up to 15.5% of interest income was applied as impairment charges for credit losses against 5.2% in the same period last year.

Interest expenses also rose by 35.6% to N107.46 billion in the third quarter, double the 17.5% growth in interest income. Interest cost therefore claimed an increased share of gross earnings of the bank from 24% in the third quarter of last year to 27.5% at the end of September this year. Interest expenses and impairment charges claimed virtually all the increase in interest income during the period.

Customer deposits declined marginally by 1.7% to N2,999 billion compared with the growth of 35.6% in interest expenses. This means the average cost of deposits increased during the review period.

The third major cost element – operating expenses moderated relative to gross earnings at the end of the third quarter. The bank was able to reduce operating cost margin from 48.6% to 43.3%. The cost saved here was however claimed by the two major cost increases.

The bank lost profit margin, as costs grew generally faster than revenue during the period. Net profit margin declined from 16.7% in September last year to 12.8% this year. The bank closed last year’s operations with a net profit margin of 17.2%. Loss of profit margin is a direct result of the rapid growths in loan loss provisions and interest expenses.

FBN Holdings shows a significantly lower profit margin than any of the five leading banks. GTB’s net profit margin is two and half times higher at 32.8% at the end of the third quarter. Zenith Bank is almost twice ahead with a net profit margin of 24.7%. UBA converted 19.6% of revenue into profit in the third quarter and Access Bank closed the same period with a net profit margin of 18.7%.

FBN Holdings closed third quarter operations with a marginal decline in the size of the balance sheet, which was led by a decline in the net loan portfolio. At N1,908.68 billion, loans and advances to customers have declined from the closing figure of N2.19 trillion in 2014.

The bank earned N1.47 per share at the end of the third quarter, which is a decline from N1.70 in the same period last year. The full year earnings per share projection is N1.88 for FBN Holdings in 2015, against N2.55 in the 2014 full year.