The stock price of one of Nigeria’s largest bank by assets has rallied 68% this year alone. Shares may be at the beginning of a multiyear uptrend supported by changing fundamentals
Fig 1: FBNH 1 year chart
Source: FT Markets data
If you invested N10, 000,000 (10 million naira) in the stock of FBN Holdings at the beginning of the year (2017), the value of your investments would be N16.8 million today.
That would be equivalent to a total return of 68 percent or a cool N6.8 million in capital gains in just 8 months.
Stock prices reflect how a business is doing and even more importantly, what the corporation is expected to do in the near future.
Earnings growth reflects the business conditions of a corporation. If annual revenues and earnings are rising then investors will want to own a part of that company and on the stock market, net purchases will increase and the price of the stock will also rise.
FBNH shares are rising because investors are beginning to see leadership promises (made by Adesola Adeduntan, chief executive officer of FBN Holdings’s main First Bank of Nigeria unit, the biggest contributor to profits) translating into improved performance in the past 6 quarters (January 2016 to June 2017).
FBNH revenues show dominant position
In 2016 FBNH recorded the highest industry top line among all major deposit money banks as gross earnings increased by 15.7 percent year-on-year (y-o-y) to N581.8 billion.
Non-interest income surged by 68.9 percent to N165.5 billion an indication of FBNH revenue generating capacity.
Net-interest income came in at N304.4 billion, up 14.8 percent, while Profit before tax of N22.9 billion was up 6.3 percent y-o-y and Profit after tax of N17.1 billion increased by 10.3 percent.
In the half year (H1), 2017 period (January – June), FBNH gross earnings rose by 7.8 percent to N288.8 billion, while Interest income grew by 37.3 percent YoY, bolstered by the enhanced interest income opportunities given currently high yields on government treasuries.
“We analyse the banks’ performance over the past two years to determine why some banks have consistently outperformed others in this environment. We conclude that 1) more liquid banks such as FBN Holdings (FBNH)…that have contained funding cost pressures have been the biggest beneficiaries of a tight monetary policy environment,” Renaissance Capital said in a September 20 report on the Nigerian Banking sector.
Non-interest income for the H1 2017 period fell by 46.3 percent to N50.5 billion but would have grown by 22.9 percent if you discount the extremely high FX revaluation gains (N53.0 billion) booked in H1’16 following the 40 percent naira devaluation.
Asset quality rises on better risk management
In 2016 FBNH overhauled the Risk Management framework and governance of the Commercial banking group.
FBNH has embarked on proactive means of dealing with challenged asset portfolio with a single digit non-performing loan NPL target by 2019.
In H1, 2017 impairment charges declined by 10.7 percent YoY to N62.4 billion as the NPL ratios declined to 22.8 percent in Q2’17 from 26.0 percent in Q1’17, as the bank wrote off previously provisioned NPLs in Q2’17.
“We are encouraged by the progress FBNH has made in cleaning out its loan book, but believe current levels are attractive entry points for investors with a longer-term horizon,” Renaissance Capital said in its recent report.
Management stated in a conference call that it will reclassify a major asset from non-performing loan status to performing loan status in Q3’17, which is a positive sign for the banks continually to improving asset quality.
At year-end 2016, First bank restructured 5 percent of its portfolio, with the oil and gas sector accounting for 70 percent of the total.
First Bank is expected to continue to restructure loans, particularly in the downstream oil, manufacturing, and general commerce sectors in 2017.
Ratings upgrade confirms
On June 21, 2017, S&P Global Ratings revised its outlook on First Bank of Nigeria Ltd to stable from negative and affirmed its ‘B-/B’ long and short-term counterparty credit ratings on First Bank.
At the same time, S & P raised its long-term national scale rating on First Bank to
‘ngBB+’ from ‘ngBB’, while affirming its short-term national scale rating at
The ratings agency also took the same rating actions on FBN Holdings PLC (FBNH).
Standard and poor’s noted that First Bank of Nigeria Ltd.’s regulatory capital has improved and the risk of breaching regulatory requirements has thus diminished, while the bank’s funding and liquidity remain a credit strength.
“The stable outlook reflects our view that the bank will maintain its regulatory capital adequacy ratio (CAR) above the minimum requirement, continue to stabilize asset quality, and maintain its’ above average funding and adequate liquidity over the next 12 months,” S & P said.
Efficiency gains driving improved performance
FBNH has seen a remarkable growth in efficiency and drop in cost to income ratio which is driving performance.
The cost to income ratio was 47.0 at the end of 2016 down from 61.3 percent in Dec 2015.
The improvement was achieved largely through entrenched discipline in budget and procurement, optimising manning levels across functions and other conscious cost containment measures of the Group.
Drilling down we see that regulatory costs were down (-4.0%, N1.2 billion) to N28.8 billion, advert and corporate promotions (-25.3%, N2.1 billion) to N6.3 billion, directors remuneration (-45.0%, N2.9 billion) to N3.5 billion, legal and professional fees (-19.7%, N1.2 billion) to N4.9 billion, net insurance claims (-33.8%, N1.1 billion) to N2.2 billion amongst other several cost line declines.
Cost of funds improved to 2.8 percent in December 2016, (Dec 2015: 3.7%) indicating better efficiency in pricing. Consequently, net interest margin increased to 8.8 percent from 8.1 percent in the prior year.
First Bank’s Capital Adequacy Ratio improved to 17.8 percent in H1, 2017 from 15.4 percent on June 30, 2016, following a write back of a capital charge of N29 billion ($95 million) and an increase in retained earnings.
First Bank total asset and net asset increased by 2.4 percent and 10.9 percent to N4.9 trillion and N579.9 billion respectively in H1, 2017.
This bank closed at N5.67 and currently trades at about 0.34 times tangible book value per share, or the theoretical price that shareholders would get if all assets were sold and liabilities paid-off.
The large asset base from which earnings can be generated combined with low valuation suggests a mismatch and an opportunity for investors to profit from higher stock price in the future.