FBN Holdings: How the Financial Services Conglomerate Stands
FBN Holdings Plc. (FBNH) has successfully weathered yet another hit on the brand, coming out stronger and better prepared to take the world by the storm after its recent governance ordeal that calls for regulator’s intervention.
The Central Bank had ordered a complete boardroom overhauling after key actors representing various vested interests impacted the brands which have existed for more than 125 years.
In history, two key issues have also played at the forefront of all banks that went down – insider loans and ambitious acquisition driven by the empire-building tendency of the Board of Directors. While insider loan still came out to be an issue, the FBNH brand has totally outgrown empire building.
FBN Holdings 5-Year Performance
After its balance sheet restructuring program, the oldest financial serviceS boutique came out strong with impeccable earnings results as indicated by key performance metrics.
Analysts at MarketForces Africa believe that numbers have no soul or emotion, and when audited by the big four, skepticism about its quality or authenticity reduced a great deal -numbers don’t lie.
In the last five years, the group had not reported a better previous year in terms of profitability. The improvement in the group earnings profile is also supported with what Meristem Securities Limited called a beautiful turnaround as asset quality strengthens.
Specifically, FBN Holdings’ after-tax profit expanded at an average annual growth rate of 34.55%, rising from N17.141 billion in 2016 to N75.591 billion in 2020.
This growth trajectory was practically supported by improved assets quality over the period, especially its three years balance sheet repair assignment.
According to analysts at United Capital, they said non-performing loan ratio fell to 7.7% as legacy NPLs were contained to below 1.1% in the financial year 2020.
The group financials also indicated that over the last five years, impairment on credit losses has consistently dropped, falling at about 26% on the average per annum, from N226.037 billion in 2016 to N50.596 billion in 2020.
Overall, since 2015/2016 economic stress that plunged lender’s performance, key prudential metrics have improved from the base period when its numbers plunged due to a significant amount in bad assets.
At the time, FBN Holding operated a partially broken balance sheet, which led to CBN intervention and forbearance, noting the strategic position of the lender in the Nigerian economy.
First Bank Limited
The performance outturn of the banking arm is key to the group earnings profile, analysts said. First Bank of Nigeria Limited, the banking arm remains the cash cow to the group, accounting for the largest chunk of total profit.
So, when Adeduntan resumed as First Bank’s Chief Executive Officer in 2016, the tasks before him were clearly spelled out by the Board of Directors.
The helmsmen at the top affair of a centenarian lender knew that rollercoaster strategy would make no difference, which gave birth to a three years balance sheet repair program.
At MarketForces Africa, we believe that when a bank is a bank, it does what a bank has to do to remain profitable for shareholders, stay connected with regulators and deliver cutting-edge services financial services for customers.
For shareholders, FBNH has consistently raised dividend payments to shareholders in the last five years, while earnings retention has helped the group strengthening its Tier-1 capital position.
5-Year Profit Performance
In 2016, FBN Holdings profit after tax printed at N17.141 billion over a total asset valued at N5.5 trillion earned 48 kobos per share, of which it paid 20 kobo as a dividend.
A year after, First Bank bucked the low earnings trend as the bank’s profit after tax expanded strongly from N17.141 billion to N45.482 billion. The board of directors raised dividend payment to 25 kobo as earnings per share jumped to N1.71.
Again, FBN bolstered its earnings in 2018 as profit more than three times the record level achieved in 2016. Specifically, with the decision to put the bank on the growth trajectory, profit after tax rose to N58.309 billion, lifted earnings per share to N1.27 while dividend per share settled at 26 kobo.
In what now appeared like a pattern, First Bank outpaced 2018 earnings performance in 2019 with further growth in both earnings and dividend per share to N1.84 and 38 kobo respectively.
Profit for 2019 had printed at N66.044 billion amidst the financial services company’s restructuring program.
Despite the pandemic-induced economic stress in 2020, First Bank group profit also jumped to N75.591 billion, resulting to earnings per share of N2.11 while FBNH paid 45 kobo per dividend.
Key Performance Metrics 2016-2020
FBN Holdings non-performing loan had hit the rooftop as asset quality dropped significantly due to legacy asset that was not performing at the period.
As a result of weak assets quality, the group cost of risk peaked at an all-time high at 10.40% while the capital adequacy ratio printed at 17.80, ahead of CBN 16% benchmark for international banks.
The non-performing loan ratio moderated in 2017 to 22.80%, more than four times what the CBN guided, which then affected its capital adequacy position which stood at 17.70% as cost of risks printed T 6.40%.
Amidst economic pressure that characterised the financial year 2018, FBN Holdings’ non-performing loans lost earlier gain, jumped to 24.70% as the decision to write off some bad assets became imperative to a stronger earnings profile.
Then, capital adequacy ratio moderated again to 17.30% with cost of risk coming lower to 3.80%.
The group asset quality improved in 2019 when the management yanked off bad assets under its balance sheet repairing program. So, non-performing loans dropped to 9.9% but the capital adequacy ratio jerked down to 15.50%.
Printed at 17% in 2020, the holding’s capital adequacy ratio has raced ahead of the CBN benchmark while it’s reported 7.7% non-performing loans ratio – the lowest in the last five years.
The Homecoming of the Elephant
In its equity report, analysts at WSTC Securities limited recognised the Group improved records across its major performance metrics in the financial year 2020.
“We note that the Group faced a tumultuous period in the past few years, resulting from the 2016 economic recession.
“For instance, the Group’s asset quality materially improved, as nonperforming loan (NPL) ratio lowered from 24.40% in the financial year 2016 to 7.70% as of 2020”, WSTC Securities said.
Analysts said FBN Holdings has also made a considerable progress in its efforts to maintain an adequate capital position.
“During the financial year, the Group injected the proceeds of the sale of its insurance subsidiary to capitalise its banking subsidiary.
“As a result, the banking subsidiary’s capital adequacy ratio improved from 15.50% as of 2019 to 17.00% as of 2020 compare with 15% sets as a regulatory threshold”, WSTC said.
WSTC recognised macroeconomic challenges facing the sector, notably the volatilities in the foreign exchange market and weak household consumption, but analysts said they expect to see a rebound in the group’s interest income due to the rising yields in the fixed income market.
“The higher interest-rate environment also effectively implies a higher interest expense; however, we believe that the low-cost funding profile of the Group positions it to expand net interest margin in the near term.
“We also expect the Group to deepen its digital footprints in the near to medium term, and we expect to see continued value accretion from the digital banking space”, analysts stated.
In Financial Year 2020
FBN Holdings Plc reported a 2% decline in gross earnings from N590.29 billion in 2019 to N578.95 billion in 2020. On the back of a low-yield environment, interest income declined by 11% from N431.93 billion in 2019 to N384.79 billion in 2020.
Non-interest income, however, grew by 23% from N158.37 billion in 2019 to N194.15 billion in 2020 – driven by net gains on investment securities which surged 175% from N17.49 billion to N48.08 billion, and a 10% increase in fee and commission income from N103.38 billion to N113.32 billion.
Also, driven by solid non-interest income growth, operating income grew by 3% year on year from N366.38 billion in the financial year 2019 to N375.72 billion in 2020.
The Group’s cost-to-income ratio lowered by 100 basis points from 79% in 2019 to 78% in 2020. As a result, profit before tax grew by 11% from N75.29 billion in 2019 to N83.70 billion in 2020 while profit after tax grew by 14% from N66.04 billion in 2019 to N75.59 billion.
United Capital said in a report that stellar non-interest income and improved risk management framework brightens FBNH prospects in its 2021 projection.
Naira Swings as External Reserves Shed $204.40 Million
“We are of the view that the stellar non-interest income performance was supported by agent banking dominance, improvement in operating expenses, and benefit from improved risk management framework.
“More importantly, improved capital adequacy ratio, buoyed by divestment from the insurance business, looks good on the Bank, as it can better withstand the lingering impact of the Covid-19 pandemic”, the firm added.
As such, analysts at United Capital said they expect pre-tax profit and post-tax profit to sustain an uptrend in 2021 amid a reversal in the yield environment which should bolster interest income.
FBNH announced a final dividend of N0.45 per share, compared to EPS of N2.45, this implies a payout ratio of 18.0% relative to an average pay-out of 17.0% in the last 3 years.
Specifically, the bank reported that agent banking grew by over 100%, tallying at 86,000 agents across all local government areas in Nigeria, as well as expansion of the scheme to Ghana, DRC & Guinea.
“While improvement in asset quality appears unusual in a pandemic year, based on developments in other jurisdictions within the continent, our most convincing rationalization is that efforts by the bank to rebuild its balance sheet, after the 2015/2016 episode of asset quality deterioration, appears to have prepared the bank for the 2020 economic turmoil which was triggered by the pandemic”, United Capital Analyst Wale Olusi said in a report.
Analysts recalled that FBNH injected fresh Tier-1 capital into First Bank Ltd (the commercial banking division), to reinforce its capital positions during the year.
This resulted in a 150bps increase in the capital adequacy ratio of FBN Ltd to 17.0%. To achieve this, a 65% stake in FBN Insurance was divested. Meanwhile, the capital adequacy ratio for the merchant banking division surged from 17.7% to 26.6%.
“Clearly, this supports our view that the bank has not only learned from its recent experience but has also become smarter in managing a subsequent crisis as a result. Overall, the balance sheet position looks healthy amid a sustained increase in customer deposits, up 21.8% year on year to N4.9 trillion.
“This puts net loans to deposits at 46.8%, suggesting that the bank is very liquid. Notably, to support its dollar liquidity, FBNH raised a Eurobond worth $350 million in 2020”, analysts said.
In line with the industry trend, First Bank of Nigeria Holding Plc 2020 financial performance was supported mainly by non-interest income, supported by higher transaction volumes from the bank enlarged agency and digital platforms, increased credit-related fees.
As well, elevated prices of investment securities were instrumental in providing respite for gross earnings, which dipped marginally by 1.92% to N578.95 billion.
“We highlight the impressive growth of 45.87% year on year from trading gains, credit related fees, and E-banking fees, which now constitute about 75% of total non-interest income”, said Meristem Securities Limited.
“Our outlook for interest income is positive, fueled by the upward repricing of yields on investment securities.
“We think that Management’s intention to replicate the agent banking strategy in other African subsidiaries would support transaction volumes and potentially sustain non-interest income growth”, analysts at Meristem added.
FBN Holdings: How the Financial Services Conglomerate Standsits
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