FBN Holdings Plc: Devaluation Serves as Earnings Outperformance Catalyst

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FBNFBN Holdings Plc (FBNH) released its half year result for the period ended 30 June 2016, yesterday. Annualized EPS (earnings per share) was N1.97 (H1’15: N2.20), outperforming both consensus and our estimate of N1.24 and N1.25 respectively. Return on Average Equity (RoAE) for H1’16 decreased to 12.0%, from 14.4% in Q1’16 but was ahead of our forecast of 7.5%. Following revisions to our estimates on account of the outperformance, we upgrade our TP to N5.00 (previous N4.00) and place a BUY recommendation.

Net interest income declined by 5.0% y/y and 2.7% q/q as net interest margin contracted to 7.2% (from 7.8% and 8.1% in H1’15 and Q1’16 respectively). The NIM moderation occurred on the back of a decline in yield on interest bearing assets following a combination of lower yield on investment securities and deterioration in loan mix (increased portion of lower yielding FCY loans following devaluation).

The c.40% naira devaluation recorded in H1’16 caused net loans and customer deposits to expand by 16.2% YTD and 4.2% YTD respectively. Non-interest income also received a boost from the devaluation, expanding 52.0% y/y and 229.7% q/q, after the Group recorded N54 billion in net foreign exchange income, primarily from FX revaluation gains in Q2’16.

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Cost to income ratio declined significantly to 47.4% from 61.4% in FY’15, as the Group’s recent efficiency drive (started in Q4’15) led to a material reduction in operating expenses (-13% y/y). Cost of risk remained elevated at 6.5% (from 2.6% in Q1’16) as asset quality deteriorated with NPL’s increasing to 22.8% from 21.5% in Q1’16.

Following the Q2’16 earnings surprise, we are revising our 2016 EPS and ROAE forecasts upwards to N1.62 and 9.7%, from N1.24 and 7.5% previously. Our revised estimates incorporate the impact of the significant gains from FX devaluation on non interest income in H’16 and a further 15% devaluation in H2’16. We expect FBNH’s NIM to come under pressure as cost of funds increase following the MPC’s decision to hike MPR by 200bps in it July meeting. Net loans and customer deposits should increase by 19.7% y/y and 15.4% y/y respectively also on the back of devaluation expectations. We do not expect any major improvement on the asset quality front and expect NPL ratio and cost of risk of 21.0% and 4.6% respectively.