FBN Holdco appears to have regained its growth steering wheel. The financial behemoth has gradually emerged from its 2021 speed bump delay and navigated towards a steady path to sustained tier 1 status. How long this last will depend on how well the bank has addressed Proshare's earlier concerns over corporate governance and CBN forbearance. The group's gross earnings and PBT grew by +26.59% and +99.29%, respectively, driven by high yields on investment securities and interest income on loans and advances. The emergence of different digital products from FinTechs and other banks has created intense competition in the digital banking space, which could flatline profits. However, the management successfully trimmed non-performing loans (NPLs) to 4.7% (within the regulatory threshold of 5%), while its cost-to-income ratio (CIR) was wrestled down to 65% from 72.2%.   

Analysts noticed the group restructured about 13% of its gross loans under the CBN COVID forbearance programme, contributing to the increase in its impairment charge from N34.83bn in 9M 2021 to N36.71bn in 9M 2022. The Holdco's deliberate effort to return to its record performance of past decades in an economically volatile environment is notable and could continue into Q4 2022 and H1 2023.  

Key Highlights 

• Net interest income leaped +53.12% between 9M 2021 and 9M 2022 as interest income grew by +42.38% and interest expense rose by a lesser +24.37% (Y-o-Y)
• E-banking dropped by -4.87% from N42.02bn in 9M 2021 to N39.98bn in 2022 
• Profit after tax grew by +123.58% while PBT increased by +99.29% from N52.93bn in 9M 2021 to N105.49bn in 2022
• Loan and advances to customers edged higher by +30.09% between 9M 2021 and 9M 2022, resulting in a +5.37% rise in the group's impairment charge in 9M 2022
• FBN's customer deposit grew by +21.88% between 9M 2021 and 9M 2022, contributing to the +15.84% growth in total assets from N8.50trn in 9M 2021 to N9.85trn in 9M 2022.
• Retained earnings increased by +88.64% to N388.12bn in 9M 2022 from N205.74bn in 9M 2021
• Depreciation and Amortization declined slightly to N20.50bn in 9M 2022 from N20.57bn in 9M 2021
• Holdco's Shareholder's fund rose by +88.64% from N205.74bn in 9M 2021 to N33.12bn in 9M 2022
• Regulatory Risk Reserve sank to N2.95bn in 9M 2022 from N18.25bn in 9M 2021

Share Price 

The Holdco's share price was volatile in 9M 2022, sliding into a bearish pennant despite improved earnings in Q1 and Q2 2022. The group's share price dipped to a support level of N8.40k in June after a major shareholder sold off his stake earlier in the month. The group saw a negative value adjustment of -10% as of September 30, 2022, confirming speculations that the strong earnings of deposit money banks (DMBs) do not necessarily, translate into bullish sentiment (see chart 1 below).

Chart 1:

Gross Earnings

The group's Gross earnings rose by +26.6% to N547.2bn in 9M 2022 on the back of the growth of the non-interest income and net interest income. The high-yield environment improved the group's return on investment securities, contributing to the rise in interest income from N260bn in 9M 2021 to N370.4bn in 9M 2022. The +7.3% rise in fees & commission and +46.96% increase in loans and advances aided the growth despite the +24.37% rise in interest expense (see chart 2 below). 

Chart 2:

Profitability 

In an inflationary environment, the Holdco saw a +99.29% growth in Profit Before tax (PBT) from N52.9bn in 9M 2021 to N105.5bn in 9M 2022, in contrast to the decline in 9M 2021. The upward adjustment in lending rate with the hawkish MPR stimulated the interest income over the interest expense; the group's interest expense and income grew by +24.37% and +42.38%, respectively. The group's digital income declined by -4.87% in 9M 2022, indicating that tight electronic banking competition affected the deposit money group's mobile businesses as new banking apps emerged (see chart 3 below). 

Chart 3:

Cost-to-income Ratio (CIR)           

The gap between interest income and interest expense pushed down the group's CIR in 9M 2022, from 72.2% in 9M 2021 to 65%. Although the operating cost rose by +22.65%, the group could reduce the higher cost-to-income ratio (CIR). The decline indicates an improvement in cost efficiency, but the ratio remains high relative to other banks. The +29.2% rise in regulatory cost and +16.30% growth in maintenance expenses pulled up the group's operating cost (see chart 4 below).

Chart 4:

Impairment Charge

As the group's loans and advances rose by +30.1% from N2.8trn in 9M 2021 to N3.6trn in 9M 2022, its impairment charge for losses skipped up by +5.37%. The HoldCo had bad debts written off worth N104bn (see chart 5 below).

Chart 5:

Non-Performing Loan (NPL)

FBNH achieved its lowest non-performing loan ratio in 9M 2022. Analysts noticed the NPL declined to 4.7 within the 5% regulatory limit with support from the +5.5% improvement in recoveries. The Holdco's NPL has steadily declined in the past four years, indicating a lower loan default rate (see chart 6 below). 

Chart 6:

Return-on-Equity (RoE)

The improvement in Net earnings by +123.6% spreads to the Shareholder's return on equity, increasing from 7.20%in 9M 2021 to 13.70% in 9M 2022. This is the highest ROE in the past four years after the slump recorded in 9M 2021. The group's equity rose by +18.56% from N753.5bn in 9M 2021 to N893.4bn in 9M 2022 (see chart 7 below).

Chart 7:

An FBNH Foot Note 

FBN Holdco's fast-paced recovery this year should restore the group to its tier 1 rank sooner than expected (Proshare will soon review its Bank Strength Index (PBSI). The group's consistent improvement in profitability, cost-efficiency, asset +coequality, and financial position from Q1 to Q3 should spread to Q4 and entirely rescind the 2021 stumble. However, the group still needs to focus on cost-optimizing strategies, as CBN's extension of the working hours to Saturday for the distribution of the redesigned naira notes will pressure the group's operating costs. Similarly, the expected increase in customer deposits (savings) in December and January should raise the group's interest expense for this period.