FBN Holdings: Recovery in progress amid challenges

FBN Holdings looks promising to close the 2016 financial year with a better earnings story than it reported last year. Its third quarter interim report shows the group has made a substantial progress on the road to recovery but the main value eroding factor – credit losses are still undermining earnings performance.

After tax profit was already standing more than 180% above the 2015 full year figure at the end of the third quarter but that seems to obscure the fact that credit losses have remained a raging fire for the second year running. The company is yet devoting an increasing proportion of revenue to loan loss expenses after a major increase last year.

The improved profit performance at the end of the third quarter reflect two major developments in the year – a windfall from net foreign exchange gains and a drop in interest expenses. These changes have provided the driving force of progress the group has recorded so far on the path of recovery.  Rapidly growing loan loss charges still stand as a big mountain ahead of the company’s new management.

FBH Holdings is facing revenue growth constraint for the second year. Gross income slowed down to an increase of 5% last year and the moderate growth is being maintained for the current year. Interest income dropped by 7.3% to N278.58 billion at the end of the third quarter, as the loan portfolio quality continues to weaken. A bailout came from net gains in foreign exchange trading, which more than tripled to N68.40 billion during the review period. That countered the drop in interest income and provided the force to grow gross earnings by 7% to N418.16 billion at the end of the third quarter.

The earnings pattern at the end of the third quarter is expected to be maintained to full year. Based on the third quarter growth rate, gross income projection is revised upward from N435 billion to N558.6 billion for FBN Holdings at the end of 2016. That will be an increase of 10.3% over the closing revenue figure of N506.30 billion the group posted in 2015.

The foreign exchange windfall is equally obscuring the underlying earnings constraint facing the company. Non-interest income dropped by 12% at the end of last year and could have been flat at the end of the third quarter without the foreign exchange gains.  The indication is that a sustainable revenue capacity is yet to be rebuilt and the rising claim of loan loss expenses on revenue is bound to continue.

A drop of nearly 30% in interest expenses at the end of the third quarter is cheering news to stakeholders. It is a faster drop than the decline of 7.3% in interest income. It is a major change from the position last year when interest cost grew ahead of interest income and eroded net interest income. This time, the company was able to push up net interest income by 5.2% to N202.91 billion at the end of the third quarter.

The cost saving from interest expenses was however a drop of water in the company’s surging flood of credit losses.  Net impairment charges rose by 146% to N114.72 billion and claimed 56.5% of net interest income at the end of the third quarter compared to 24.2% in the same period last year and 45% at the end of last year. The company expensed N119.32 billion on risk asset impairments last year and the figure could rise to about N160 billion for the current year based on the third quarter figure.

FBN Holdings closed the third quarter operations with an after tax profit of N42.52 billion, which is a drop of 15.3% year-on-year. Loan loss expenses had caused a drop of about 40% in net interest income after the charges but the full impact of the drop did not hit the bottom line. The moderating factor was the net foreign exchange gain, which prevented a possibly wider drop in profit.

Based on the third quarter figure, after tax profit is projected at N57.4 billion for FBN Holdings at the end of 2016. That will be a big recovery from the net profit figure of N15.15 billion it posted last year. The group’s profit had dropped by 82% last year from its peak profit figure of over N84 billion in 2014.

The group converted 10.2% of gross earnings into after tax profit at the end of the third quarter, down from 12.8% in the same period last year but significantly up from 3% at the end of last year. The company earned N1.17 per share at the end of the third quarter against N1.38 in the corresponding period in 2015. It closed last year with earnings per share of 42 kobo.