FBN Holdings PLC: Interest and non interest income drive profitability

First Bank Holdings Plc is a Nigeria-based bank that offers a range of financial services. The Bank is divided into three business segments: corporate banking, personal banking and e-banking services. Its products are targeted at corporate and individual customers.

The Bank operates through several subsidiaries, providing a range of banking services, including corporate banking, capital market operations, funds management, insurance brokerage, trusteeship and pension custodianship.

FBN Holdings have been able to post impressive results despite the harsh regulatory environment hindering the growth potentials of financial firms operating in Africa’s largest economy.

The Nigerian lender’s strong margins are a reflection of hard work by the savvy management of the bank as they were able to seek high interest yielding assets while maximizing share holder’s wealth.

Earnings per share (EPS) increased by 18 percent to 255k in 2014 against 216k as at December 2013.

In view of the growth at both the top and bottom line level, the bank has decided to reward owners of the business with a cash dividend of N0.10k per 50 kobo share and a scrip (bonus) issue of one (1) Share for every ten Shares held amounting to a total distribution of N1.05k per share, higher than the 1.10k it gave out in 2013. 

Strong growth in non-interest income boost gross earnings

Gross earnings for the year ended December 2014 grew by 21.3 percent to N480.6 billion from N396.2 billion the same period of the corresponding year 2013: driven by an increase of 12.03 percent in interest income to N362.58 billion from N323.62 billion over the same period.

The growth in interest income was supported by re-pricing and re-allocation of assets and investments to the shorter end of the curve given the increasing interest rate environment.

However, interest expense rose by 26.97 percent to N118.72 billion in 2014 as against N93.50 billion in 2013. It is expected that the Nigerian lender’s interest expense will increase as it operates in a higher interest rate environment driven by increased cash reserve requirements on public and private sector deposits.

The CBN thus raised its benchmark interest rate by 100 basis points to 13 percent. It said the policy is to control inflation and regulate the economy that has been receiving one or two punches due to falling oil price.

Strong growth in non-interest income supported by growth in FX and commission income

The bank grew non-interest income by 66.1 percent year on year (y/y) to N111.8 billion in December 2014 as against N67.3 billion in 2013. This was a remarkable achievement by any tier 1 bank as we had anticipated that the removal of COT charge by the CBN would stunt top line growth.

Also, the improved non-interest income can be attributed to foreign exchange Treasury bills and bond trading activities. Expectedly, COT income declined by 13.2 percent to N15.3 billion in December 2014 compared with N17.6 billion as at December 2013.    

It will be recalled that the Abuja based Apex bank reduced COT charges from N3/mille in 2013 to N2/mille in 2014 – a policy that has been crimping the growth potentials of lenders.

FBN Holdings’ gains on foreign exchange surged by 570.85 percent to N44.90 billion in 2014 from N6.69 billion in December 2013. The growth in FX was on the back of enhanced treasury activities, increased volume of trade business and favourable exchange rate.

Improved profitability despite rising operating expenses

FBN Holdings’ pre-tax profit increased by 1.7 percent to N92.9 billion in December 2014 compared to N91.2 percent as at December 2013.

Net income followed the same growth trajectory as it spiked by 17.3 percent to N82.8 billion as against N70.6 billion in December 2013.

The growth in net income was primarily driven by a decrease in income tax expense by 51.50 percent to N10.04 billion from N20.70 billion and a rise in operating income by 19.8 percent to N355.1 billion compared with N296.4 billion in 2013.

However, operating expenses increased by 27.5 percent to N236.8 billion in 2014 from N185.8 billion in 2013; driven primarily by increase in staff cost  by  21.3 percent y/y to N79.8 billion, regulatory cost (+21.0 percent) to N30.2 billion and advert and corporate promotions +52.7 percent y/y to N12.7 billion.

Lenders in Nigeria have been groaning under regulatory induced costs called the AMCON charge that mandated commercial banks to pay 0.5 percent of total assets to the sinking fund.

These compulsory level banks say is haemorrhaging their profits and impacting on efficiency level.

The reflection of the regulatory induced costs impacted on FBN holdings cost-to-income ratio which increased to 66.70 percent in 2014 from 62.70 percent in 2013. We advice the bank to improve on its efficiency as this will enable the lender boost bottom line.

Expansion in loans and deposits boost balance sheet

For the year ended December 2014, FBN Holdings grew total assets by 12.20 percent to N4.30 trillion in 2014 compared with N3.9 trillion as at December 2013.

The growth in total assets was driven primarily by a 17.50 percent increase in cash and balances with the CBN to N698.10 billion in 2014 from N594.23 billion as at December 2013 while loans and advances moved by 23.20 percent to N2.2 trillion as against N1.8 trillion as at December 2013.

It must be noted that the growth in loans and advances to customer was a results of the bank’s increased lending to general commerce, construction, oil and gas and power. Corporate and institutional banking customers constitute 70 percent of the loan book with retail loans at 16.1 percent.

The bank is also aggressive about lending as loans to deposit ratio jumped to 72.80 percent in December 2014 compared with 61.90 percent as at December 2013.

Also non performing loans increased by 19 percent year on year to N64.8 billion from N54.3 billion the same period of the corresponding year; However,  the bank’s nonperforming loan (NPL) ratio reduced  to 2.9 percent in 2014 as against 3 percent as at December 2013.

Shareholder’s fund increased by 11 percent to N522.90 billion in 2014 compared with N471.81 billion in 2013 over the period leading to an increase in  return on average equity (ROAE) to 16.70 percent in 2014 as against 15.50 percent as at December 2013. Return on average assets (ROAA) remained flattish at 2 percent.

FBN Holdings liquidity ratio which increased to 44.0 percent in 2014 from 44.20 percent and capital adequacy ratio that rose to 16.7 percent in 2014 from 13.6 percent remain well above the minimum regulatory requirement of 30 percent and 15 percent respectively.

Consolidating market share through Inorganic growth

The bank is unrelenting as it continues to increase its share of the Nigeria market through the combination of focus strategy and market penetration. One of the strategies it uses is the mechanism of inorganic growth.

FBN Holdings completed the acquisition of 100 percent equity of Kakawa Discount House Limited (Kakawa) which is now a direct subsidiary of FBNH. Its FBN Insurance Limited completed the acquisition of 100 percent equity interest in Oasis Insurance Plc.

Also, FirstBank acquired ICB Senegal to complete the acquisition of the International Commercial Bank’s (ICB) West African operations.

FirstBank concluded a US$450 million subordinated Tier 2 debt issuance in the international markets for general banking purposes.

Share performance and outlook

The stock closed trading at N9.53 a share on Thursday April 16 2015 and currently has a price-to-book ratio of 0.60, making the shares cheap relative to other banking stock.

FGNHOLDINGS group had a market capitalisation of N310.98 billion the same day.

Nigeria’s Gross Domestic Product grew at the rate of 5.94 percent y/y in Q4 2014, down by 83bps from 6.77 percent recorded in the corresponding quarter of previous fiscal year. The non-oil sector was the major driver of the growth recorded in Q4 2014, with activities in crop production, trade, textile and real estate contributing the most.

With the conduct of a fair and peaceful election, investors’ confidence in the country’s economy has increased which means the economy may pick up in last quarter of 2015.

Headline Inflation increased to 8.4 percent y/y in February 2015 from 8.2 percent y/y recorded in January 2015. The marginal rise in the rate was mainly as a result of the increase in the prices of seven of the non-food commodities classification, especially alcoholic beverages and transportation costs.

Nigerian foreign reserves decreased by $5bn (12.7 percent) from $39.5bn at end of Q3 2014 to $34.5billion at end of Q4 2014.

BALA AUGIE