FBN Holdings: Profit headed down for the third year

FBN Holdings is seeing for the third year running a divergence of growing revenue and declining profits. Underlying these trends are two major cost lines of the bank that are warring against its bottom line. One is loan loss expenses in the face of growing non-performing loans and the other is interest cost. 

In the past two years, the bank has charged as much as N345 billion to its profit and loss account in credit loss expenses. This represents revenues that were channeled away from profit because of heightened growth in bad loans. The charges are still rising rapidly in the current financial year, having climbed a clear 126% year-on-year at the end of the first quarter.

Interest expenses are also rising at a faster pace than earnings are growing, which is depressing net interest income. Interest cost grew almost twice as fast as interest income in the first quarter at 73% compared to 37%.  That prevented a good part of the increase in interest income from flowing down into the bottom line.

The rapid growth in the two major cost lines claimed more than all the increase in gross earnings during the period and therefore sent profit falling for the third year in a row. Operating expenses are however largely under control – the only major expense line that isn’t making fresh incursions into revenue. Profit margin declined from 19.3% in the same period last year to 11.2% at the end of the first quarter. That still represents a big leap from the net profit margin of 2.1% the bank recorded at the end of last year.

Gross earnings amounted to N141.30 billion for FBN Holdings at the end of the first quarter, a year-on-year growth of 31.3%. Interest income provided the strength for the growth achieved despite the risk asset quality problem facing the bank. Its year-on-year growth of 36.7% to N114.12 billion in the first quarter was diluted by a significantly lower growth of 12.5% in non-interest income.

Based on the earnings growth in the first quarter, gross income is projected to be in the region of N576 billion for FBN Holdings at the close of 2017. That will be a marginal decline from the gross earnings of N582 billion the bank posted in 2016. Revenue growth is however expected to speed up in the subsequent interim reports, as economic activities pick up in the course of the year. The bank grew gross earnings by 15.7% in 2016, accelerating from 5% in 2015.

Interest expenses grew by 72.7% year-on-year to N33.82 billion at the end of the first quarter, which is about twice the 36.7% increase in interest income during the period. This is in spite of a marginal decline in customer deposits in the first quarter from the closing figure of N3.10 trillion at the end of last year.

The effect of the high growth in interest expenses in the first quarter is a limited growth in net interest income and therefore the inability to pass on the increase in interest income down to the bottom line. Net interest income therefore grew by 25.7% compared to the 36.7% improvement in interest income.

Even a bigger wage on the flow of interest income into profit is impairment charge for loan losses, which took a high jump of 126% to N28.82 billion during the review period. That made net interest income after impairment charge flat at N51.48 billion at the end of the first quarter. This indicates that interest expenses and impairment charges consumed the entire net increase of over N30 billion in interest income in the first quarter, leaving nothing to flow down to build profit.

The problem with that is that non-interest income failed to record a substantial growth and operating cost grew by 9.2% to N55.68 billion at the end of the quarter. Growth in non-interest income was insufficient to meet the increase in operating cost. This is despite the drop in operating cost margin from 47.4% to 39.4% over the review period.

The bank had to meet the cost with a proportion of revenue that was converted into profit in the corresponding period last year. The result is a drop in profit margin and a drop of 23.5% in net profit to N15.66 billion at the end of March. Yet, the profit reported is already above the full year net profit figure of N12.24 billion in 2016.

The full year profit outlook for FBN Holdings is clouded by the unpredictable behaviour of loan loss expenses going forward. While the charge was only N12.75 billion in the first quarter of last year, the bank ended the year with a total impairment charge of N226 billion. On the other hand, a net profit of N20.47 billion at the end of the first quarter of 2016 diminished to N12.24 billion at full year.

The bank’s profit outlook is expected to become clearer in the course of the financial year. First quarter operations closed with earnings per share of 44 kobo for FBN Holdings, down from 57 kobo in the same period last year.

The management team led by UK Eke (pictured), GMD of FBN Holdings, has its work well cut out.