Shares of First Bank of Nigeria Holdings rallied Wednesday as a big decline in the tier-one lender’s NonPerforming Loans (NPLS) caught the eye of investors and offered some reassurance that the bank was on track to cut bad loans to within single digits by year-end.
The lender’s stock climbed 2.7 percent to N5.70, the biggest gain in two months, as it outperformed the 0.08 percent decline in banking stocks on the day.
At its current price, First bank’s stock holds a 50 percent upside potential on the consensus forecast of seven investment banks tracked by Businessday. The lender’s price to book ratio of 0.37 times is at a discount to peer average of 0.8 times, and means for each naira of book value, investors are valuing First Bank at 37 kobo. When a public company has a price to book ratio of below 1, it sometimes implies that it is undervalued.
First Bank published its financial statement this week that showed Non-performing loans reduced to 14.5 percent as at June 2019, from 25.3 percent in the first quarter of 2019 and 25.9 percent in December 2018. This was possible after the bank fully wrote off its N126 billion loan exposure to Atlantic Energy over the second quarter. The upstream oil and gas Nigerian company was First bank’s largest NPL.
“In line with our commitment to address the legacy asset quality challenges, exposure to Atlantic Energy, our biggest NPL, was written off in the second quarter,” said Adesola Adeduntan, the chief executive officer of the bank.
“This is material progress in our legacy NPL resolutions and clearly reflects our resolve towards achieving a single digit NPL ratio by year end. In addition, this step creates significant headroom for increased business opportunities and enhanced earnings especially in the lucrative Oil & Gas sector of the economy,” Adeduntan said during an investor call Tuesday.
Reflecting the write-off, the lender’s gross loans declined 9 percent to N1.9 trillion in the second quarter. However, net loans grew 4.2 percent to N1.7 trillion, suggesting the bank created additional N43 billion loans over the quarter.
The NPL decline “brings us closer to our FY 2019 target and creates more headroom for quality asset growth,” said UK Eke, the group hanging director of the bank.
“This is paving the way for sustained improvement in asset quality and a further reduction in impairment charges that will allow us to take advantage of enhanced earnings opportunities when they arise,” Eke said during an investor presentation.
Nigerian banks took a hit to their asset quality in 2016 after tumbling global oil prices triggered a spate of bad loans on credit given to companies in the oil and gas sector. First Bank was one of the worst hit, with 47 percent of its loan book at the time comprised of the once lucrative oil and gas debt. However, recovering oil prices and production in Nigeria has paved the way for some of those bad loans to turn the corner. Crude oil (Brent) prices have largely hovered around $65 per barrel this year, more than double the record low it fell to in January 2016.
First bank’s asset quality problems were not necessarily due to only a cyclical pickup in NPLS, but importantly were driven by legacy corporate mis-governance issues which the new management is now fixing, according to bank sources familiar with the matter. This they say is spurring renewed investor confidence in the bank and rubbing off on its shares.
First bank’s half year financial scorecard also showed a 0.3 percent year on year increase in gross earnings to N294.2 billion and a 2 percent decline in net interest income to N146 billion.
Non-interest income increased 3.6 percent to N63.6 billion while impairment charge for credit losses declined 58.1 percent to N22.1 billion.
Operating expenses rose 24 percent in the period to N148.3 billion.
While Profit before tax was up 2.6 percent to N39.9 billion, after tax profit fell 5.4 percent to N31.7 billion.
“We are confident in the Group’s ability to deliver stronger results sustainably as we execute our strategy and unlock earnings potential from recent investments in innovation and digital transformation. This will enhance our future earnings capacity and drive operational efficiencies that will enable the generation of superior returns to our shareholders,” Eke added.
Rising operation costs, a decline in profit after tax and a contraction in capital adequacy ratio (CAR) to 15.6 percent in the second quarter from 16.5 percent in the first quarter were low points for the bank.
