FBNH FY 2023 and Q1 2024 Results Rebound Looks Promising as Net Profit Rises +124.14%

“In this life, rain is going to fall, but the sun will shine again,” – Kwame Alexander

When Loans Go Bad.

Despite a turbulent decade, FBNH, Nigeria’s oldest financial market lender, has demonstrated remarkable resilience in overcoming odds associated with a legacy institution. It has effectively tackled issues such as board governance recalibrations, high cost-to-income ratios (CIRs), poorly balanced loan asset distribution, large non-performing loans (NPLs), and overweight bank clearing house exposures to lower-tiered deposit-taking institutions. This period of adversity may potentially strengthen the financial group, making it more resilient, better managed, and focused; even as it looks into management resource capacity building and resolution of structural adjustments needed to reposition the bank post-recapitalization.

Recent public information will suggest that while the bank moves to quickly affirm a substantive managing director and set about the task of recapitalization; the work done to date by the previous management will further benefit from a swift resolution of the numbers from a post CBN-oversight review around balances arising from digital banking operations returns, unreconciled balances, FX-related deposit movements, and standard loan balances review.

Analysts believe the CBN’s payment of Heritage Bank’s debt, as determined, not only signaled a positive outlook for the bank with the reduction of the forbearance balances on FBNH’s books; but strengthened its position as a systemically important bank (SIB).

Speaking anonymously, an insider expressed optimism about the bank’s future, stating, ‘With the Heritage Bank issue resolved, we can now focus on regaining an industry position more consistent with the bank’s age, pedigree, and collective staff expertise.’ This positive outlook should inspire confidence among stakeholders in FBN’s future since the banking arm continues to dominate the group’s operation.

Analysts observed that FirstBank has shown resilience in the face of internal and external difficulties, showing relatively strong financial performances in FY 2023 and Q1 2024. The asset repricing on loans and advances and off-balance sheet asset gains nudged gross earnings forward, thereby cushioning the heavy foreign exchange losses and rising operating expenses. FBNH’s gross earnings and pre-tax profit grew by +95.70% and +126.86% to N1.60trn and N350.59bn in FY 2023, and even higher growth performance was recorded in Q1 2024 (+181.43% and +325.15% for gross earnings and PBT, respectively).

The strong gross earnings and profit growth resulted in improved financial ratios, except for the cost of risk (CoR) and the non-performing loan (NPLR) ratios, reflecting rising funding costs and the deterioration in loan quality. However, the group’s niggling operating headache eased in Q1 2024 as the lender’s cost-to-income ratio (CIR) fell below 50% or below a 5-year average of 60.31%.

The improvement came partly from higher interest and non-interest incomes and sustaining this in 2024 is crucial, considering the forecast direction of macroeconomic indicators and monetary policy. For instance, rising inflation and currency volatility may lead to higher interest rates, a situation usually favourable to banks’ loans & advances and interest-based investments. Analysts believe the group’s improved core financial metrics in FY 2023 should re-establish its tier 1 status in the Proshare Bank Strength Index (PBSI) 2024 and raise its ranking ahead of competitors.

FBNH’s earnings have grown steadily by an average of 41.5% in the past five years, and its price-to-earnings (P/E) ratio sits at 2.74x compared to the industry average of 7.5x. The price-to-book value (PBV) is below 1 at 0.48x. Analysts expect investors to remain cautious about banking stocks while awaiting their recapitalisation strategies and future earnings projections.

Board of Directors

FBNH’s ability to manage post-leadership changes, whilst emerging as an institutional learning advantage, will continue to be tested; The market watches keenly how this recent change is managed.

With four (4) board members resigning, FBNH’s board members dropped to eight in FY 2023 from eleven (11) in FY 2022. However, Holdco appointed two directors (non-executive and independent non-executive directors) in Q1 2024, raising the total number of board members to ten (10). Also, FirstBank appointed two (2) new board members, raising the total number of board members to 14 in Q1 2024.

 

Gross Earnings

FBN Holding’s gross earnings have grown by an average of 19% annually. It settled at N1.60trn in FY 2023, rising by +95.70% from N815.16bn in FY 2022. The earnings growth came from interest and non-interest income, narrowed down to investment securities, loans and advances, gains from FVTPL (derivatives), and fees and commission income. Interest income had a higher contribution at 60% relative to 40% from non-interest income, reflecting that core operation drove the income growth. The +153.67% growth in non-interest income to N601.70bn stemmed from net gains from financial instruments at FVTPL (N246.08bn), net gain on sale of investment securities (N34.85bn) and fee and commission income (N226.45bn). The commercial banking segment remained the lead gross earnings driver, contributing 94%, while Merchant bank and asset management contributed 6%

The persistence of naira depreciation and aggressive rate hikes sustained interest and non-interest growth in Q1 2024. The group’s gross earnings grew by +181.43% to N730.30bn in Q1 2024 from N259.50bn in Q1 2023. The growth came from higher investments, loans & advances, fees and commission income, and net gains from financial instruments at FVTPL.

ranking of banks; some were forced behind as technology-driven ones took the spotlight. The oldest Nigerian bank was not exempted from the reshuffle; the bank slipped from the fourth position in asset size in 2019 to the fifth position in 2022 and has remained in the position, outran by UBA.

In terms of profitability, FirstBank climbed from 7th in 2019 to 4th in 2023 and 3rd by Q1 2024. The rapid growth was driven by the group’s strategic plan despite the corporate governance struggle.

FBNH’s consistently low dividend payout (hovering below N1) has kept the dividend yield behind that of other industry players. The group’s dividend yield slumped to the rear end by 2023, with ten (10) banks ahead of the entity, compared to six (6) banks in 2019.

The banking industry saw gross earnings and profitability climb to record highs, benefitting from MPR increases and naira devaluation. Among the tier 1 banks, Access Holding saw the highest gross earnings at N2.59trn, followed by other two banks with gross earnings above N2trn and FBNH and GTCO with earnings below N2trn at N1.59trn and N1.19trn respectively. The positions were slightly different coming to profitability, with Zenith Bank taking the lead at N795.96bn, ahead of UBA (N757.68bn) and Access Holding (N729.00bn), while FBNH had a more modest figure at N350.59bn behind GTCO. Analysts noted that despite GTCO being behind FBNH in gross earnings, GTCO was more profitable.

The banks’ high earnings caused earnings per share for most banks to grow to double digits except for FBNH, which had a single-digit EPS of N8.59k. Zenith Bank had the highest EPS at N21.55k ahead of Access Holding, implying that Access Holding incurred higher operating costs, eating into its profit relative to Zenith Bank. Nevertheless, Access Holding retained its position as having the largest customer deposit at N15.32trn ahead of UBA and Zenith, while GTCO had the lowest tier 1 bank deposit base size at N7.41trn.

GTCO, however, had the highest net interest margin (NIM), return on equity (ROE), and return on assets (ROA). Also, GTCO was the most cost-efficient financial lender, with a cost-to-income ratio (CIR) of 29.10%, while FBNH was the least efficient with a CIR of 49.08%. The fundamental valuation of the banks showed that GTCO had the highest price-to-book value at 0.96x, but FBNH had the highest price-to-earnings at 2.74x, while Access Holding had the least at 0.39x and 1.39x, respectively. This suggests that GTCO’s market value reflects its underlying book value and earnings more than its rivals.

Despite the high-interest rate environment, GTCO had a 1.80% cost of funds, significantly lower than its peers, with Access Holding having the highest at 4.90%. However, Zenith had the highest Cost of risk at 7.30%, while Access Holding had the lowest at 1.00%. GTCO shows better financial health than its rivals based on comparative financial statistics despite having the country’s top six banks’ lowest gross earnings, profit, and asset size.

Closing Thoughts

FBNH’s positive financial numbers would suggest that the internal governance challenges it experienced had a modest impact on its financial performance in FY 2023 and Q1’2024. To make this sustainable, analysts believe that it is important that the group resolves and tightens its governance architecture to prevent spillover effects in investors’ perceptions and consequently market valuation. We however do not believe that this will have a significant impact on its capital raising efforts.

Based on FBNH’s banking license, the group intends to raise an additional N300bn in Tier 1 equity (CET 1) either through a public offer or a private placement. Although the capital raise plan is subject to shareholder approval, market intelligence suggests the group is more than capable of raising these sums from existing shareholders and select entities; and might not therefore proceed with the public offer. This is however subject to the Holdco’s reading of the recapitalization end-game of competitors; the opportunities related to funding size and actions taken around M&A’s (for which preliminary intel suggests the Holdco would not be involved in merger talks or contemplate a license adjustment).

First Bank’s future starts anew after the industry adjudged the successful tenure of the Adesola Adeduntan era. Our analysts anticipate HoldCo’s more hands-on involvement in the bank’s strategic direction in this new dispensation.