First Bank growing revenue, losing profit

FBN Holdings Plc improved revenue growth momentum in the third quarter but profit performance weakened during the period. While the bank is headed for an accelerated growth in revenue, only a modest recovery in profit may be possible at the end of the year. Two major expenditure lines eroded profit margin in the third quarter and caused a decline in profit as at the end of September.

FBNH’s group managing director/chief executive officer, Mr. Bisi Onasanya, is still holding firmly the Nigerian banking industry leadership in respect of asset base, which amounted to N4.19 trillion at the end of the third quarter. He has however lost his bank’s position in respect of ability to convert assets into revenue [asset turnover] and in converting revenue into profit [profit margin].

In 2012, Ecobank Transnational Inc took over the leadership of the banking industry by gross earnings from First Bank and has since held it. First Bank lost industry profit leadership to GTB and Zenith Bank more than five years ago. Onasanya needs to end the stream losing ground to competitors and begin to add new strengths in earnings and profit performances.

The bank grossed N332.63 billion at the end of the third quarter, which is an improvement of 14% year-on-year. It represents an accelerated growth from the gross income of about N212 billion at the end of the second quarter. Asset yield has improved from 5.2% in the second quarter to 8% in the third, still below Ecobank’s asset yield of 9%.

Based on the revenue growth rate in the third quarter, gross income is projected at N445.8 billion for FBNH at full year. This will be a growth of 12% over the revenue figure of N396.9 billion the bank posted in 2013. It will also be an accelerated growth in revenue from 7.5% recorded last year.

Non-interest income spurred the revenue improvement achieved while weakness in interest income lowered the overall growth rate. Foreign exchange income led growth in fee-based income at 239.6% compared to only 6.9% improvement in interest income.

After tax profit declined by 5.8% to N55.63 billion in the third quarter, a significant slowdown from N37.18 billion in the second quarter. If the third quarter growth rate is maintained to full year, FBNH is expected to close the year with an after tax profit of N71.3 billion. This will be a slight recovery from the closing profit figure of N70.63 billion last year. The bank’s peak profit record is the N75.67 billion it posted in 2012. Apart from the decline last year, it has grown profit every year since 2010.

The inability to grow profit along with revenue is due to loss of profit margin. Net profit margin is down from 20.2% in the third quarter of last year and from 17.5% in the second quarter of this year to 16.7% at the end of September. This is one-half of GTB’s net profit margin of 33.5% during the same period. Other banks ahead on profit margin are Stanbic IBTC Bank with 26.7%, Zenith Bank with 26% and Access Bank with 19.4% all at the end of the third quarter.

Loss of profit margin happened due to two major rising cost lines of the bank: interest expenses and operating cost. Interest expenses rose well ahead of interest income and gross earnings at 18.7%. The proportion of gross earnings devoted to interest expenses therefore grew from less than 23% in the same period last year to about 24% at the end of September. This follows an expansion of 163% in due to banks while customer deposits declined marginally against the closing figures last year.

Operating expenses also grew ahead of revenue at 15.4% to N160.82 billion and eroded profit margin. It claimed 48.3% of gross earnings against 47.8% in the corresponding period last year.

The increases in the two cost lines more than countered some cost savings made from impairment charge on risk assets. Loan loss expenses dropped by almost 15% to N13.36 billion in the third quarter. The bank carries a net credit portfolio in excess of N2.59 trillion, an increase of close to 18% over the closing figure last year.

The bank earned N1.69 per share at the end of the third quarter, a decline from N1.81 in the same period last year. Full year outlook indicates earnings per share of N2.18 for FBNH in 2014, slightly better than N2.16 in 2013.

Loss of profit margin is the hurdle on the way of growing profit for the bank this year and the two major cost elements are the problem. The summary of the bank’s operating story this year is quite likely to be how these two major rising costs have dressed down profit.