What is changing at First Bank?
The share price of First Bank has tripled over the last few months, a development that led me to wonder whether this reflected fundamental assessments of the value of the stock by knowledgeable investors or mere movements in the share price based on emotional, ephemeral or shallow market sentiments. My thinking was framed in terms of the title of this write-up-is there something fundamental happening at the bank or FBN Holdings to justify such price movement? And what did I find?
FBN Holdings had a challenge of restoring shareholder value after the debacle of the 2016 results, and the evidence suggests that it is doing so at a pace stronger than anyone could have anticipated, certainly better than I could have imagined. I was one of those disappointed by the 2016 results and the implications it suggested in terms of risk management, corporate governance, strategy and management of the institution, and I said so to some senior members of the group’s management at the time, about one year ago. My recent investigations and analyses suggests that the group is not only cleaning up its act, but also strengthening management practices at the bank, which are delivering value to investors and other stakeholders. It does seem that the poor 2016 performance coupled with the economic recession of 2016 and Q1 2017 may have turned out as a blessing in disguise for the group-enabling a careful portfolio cleanup and restructuring and leading to reforms in terms of cost management and operational efficiencies.
For instance the group has significantly improved its cost-income ratio through increased centralization of cost centres/shared services, rightsizing, plugging leakages and enhanced value-for-money in procurement. In the commercial bank subsidiary the First Bank Group has made significant progress with digitization and automation, and is in the process of implementing an ambitious ORACLE project that is hoped to deliver further improvements in management information and enterprise management. Increasingly the group’s focus is on efficiency, not just size as seemed to be the previous priority. This of course will be the bank/group’s biggest challenge going forward-optimising its size and ensuring that it leverages its scale to enhance operational efficiencies so that size becomes an advantage rather than a liability. I think the bank made progress in this direction in 2017 and investors appear to be noticing.
The group will also benefit from leveraging diversified operations and income streams as a strategic lever in the quest to improve investor returns and organizational sustainability. Its insurance subsidiary is growing faster than its peers in the insurance space and improving its return on equity quite dramatically-the acquisition of Oasis Insurance and the partnership with SANLAM are evidently paying off; the consolidated merchant bank has had its first full year of operations after the combination of FBN Merchant Bank and Kakawa Discount House; and its asset management business is maintaining its strong profile in that sub-sector. The company appears also to have strengthened corporate governance and risk management and improved its processes and its people. The result, at least in tangible terms has been an appreciation of the share price from under N4 per share, as recently as May 2017 to over N12 by year end! There has been an injection of new people across the rank and file, including senior people in the critical risk management function.
The most impressive improvements I have observed and heard about regarding the bank however centre around its retail banking positioning! A large and growing customer base; innovations around products and channels; increased service offerings in the SME market segment; stronger profile in electronic and transaction banking including investments in on-line, mobile, USSD and ATM banking have all resulted in lower cost transaction processing, appeal to a bigger customer audience and most importantly a fresher, younger positioning of the First Bank brand. In what may have been considered implausible some years ago, First Bank is actually very competitive in the youth and millennials market segment!!! I’m told nearly 80% of the bank’s transactions are now processed through alternative channels and going forward, the bank has very audacious targets for number of customers, especially those using cards and alternative channels; number of transactions per period on alternative channels; overall cost-income ratio and cost per transaction; and investments in digital banking platforms and processes. The bank has also committed itself to a strategic focus on innovation, exploiting trends in financial technology and pioneering digital banking breakthroughs through various investments and partnerships.
Based on all I’ve seen and heard, it appears to me that the outlook is even brighter for FBN Holdings diversified businesses-increased efficiencies, product development and technical skills in the insurance business as the group continues to leverage the collaboration with SANLAM; a strong competitive and market positioning in advisory services and asset management through FBN Quest; and dominance in the trusteeship business. By the time the commercial bank completes its portfolio cleanup (and with the economic environment incrementally better as oil prices recover), the group’s fundamentals will manifest overwhelming strengths! At that point, the strategic imperative will be to avoid the mistakes of the past, especially in the credit creation and monitoring process so that value can be retained for investors and stakeholders rather than dissipated through non-performing assets. My current view is that given the quality of management and clarity of strategic thinking especially at the Holdco and the bank, the current positive trajectory is sustainable.
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