FBN HOLDINGS PLC – Earnings jump 28% y/y on core-banking gains

What shaped the past week?

Global: Major markets closed in the green this week, amid a flurry of earnings and economic data releases. Starting in the Asian region, where the performance was mixed, the Shanghai Composite slumped 4.05% w/w, as investors reacted to the latest COVID restrictions placed in Wuhan; as well as further tightening of control over Chinese companies during President Xi Jinping’s upcoming third term. Meanwhile, in Japan, the Nikkei gained 0.80% w/w as the government announced a $480 billion stimulus plan to help deal with inflationary pressures in the country, while the Bank of Japan left rates unchanged following the conclusion of its latest policy meeting. Moving to Europe, where company earnings remain in focus, the German Dax, London FTSE, and French CAC all closed well in the green, rising 4.03%, 0.86%, and 3.94% w/w respectively. On Thursday, the European Central Bank hiked all policy rates by 75bps, and investors reacted positively to this as they believe the bank will be less aggressive with future rate hikes. Finally, across the U.S., the latest round of economic data and company earnings was a positive one for the region, as the Dow Jones, NASDAQ, and S&P 500, gained 5.60%, 1.57%, and 3.65% w/w. Renewed investor optimism in the region was driven by gains in Intel Corporation and Apple Inc. as their earnings results surpassed investors’ expectations.

Domestic Economy:  The Central Bank of Nigeria (CBN) Governor announced this week that it will issue new Naira banknotes. The new bank notes (N200, N500, and N1000) will be introduced in December 2022, and the old notes will be phased out by January 2023. According to the Governor, the decision was taken to tackle significant hoarding by members of the public, worsening shortage of clean banknotes, and increased ease of counterfeiting. Bank charges for cash deposits are statutorily suspended during the exchange window.

Equities: It was another week of selloffs across Nigerian equities as the NGX sank 1.09% w/w to close at 43912.64pts. Losses in large cap names AIRTELAFRICA (-2.83% w/w) and DANGCEM (-10.00% w/w) were the primary drivers of the index red w/w close. A review of the sectorial performances revealed that the Banking and Industrial Goods sectors recorded modest w/w gains rising 0.07% and 0.34% respectively. Whereas the Oil and Gas and Consumer Good sectors closed in the red for a third consecutive week, as they eased 0.24% and 0.36% respectively.

Fixed Income:  Fixed income investors were largely bearish this week, as we witnessed an uptick in sell-side momentum across the secondary market. Starting in the bonds space, yields rose 18bps on average, driven by sell-side activity at the short-long end of the bonds curve. Notably, the yield on the FGN-JAN-2026 bond soared 74bps w/w to 14.84%, while the yield on the 14.80% FGN-APR-2049 bond surged 126bps w/w to 14.99%. Likewise, in NTB segment of the market, yields closed higher w/w due to profit-taking at the mid-long end of the market; the yield on the 182DTM soared 723bps to 13.16%.

Currency:  The Naira depreciated ₦0.92 w/w at the I&E FX Window to N444.75.

What will shape markets in the coming week?

Equity market: In the short-term, we still expect earnings result to dictate market direction, as investors continue to trade cautiously.

Fixed Income:   We expect the secondary market to open the week on a mixed note, as investors await the latest batch of economic data. Meanwhile, we expect system liquidity to dictate activity across the T-bills segment.

FBN HOLDINGS PLC – Earnings jump 28% y/y on core-banking gains

Yesterday, FBNH released its 9M’22 results, showing a 28% y/y jump in Gross earnings to N547 billion, in line with our expectations. As with other banks, the strong growth came as the result of a 42% y/y rise in Interest Income to N370 billion, thanks to a 47% y/y rise in income from loans and advances, which came in at N270 billion. On the other hand, the bank’s Non-Interest Revenue (NIR) grew by a more modest 5% y/y to  N157 billion, as the bank saw a 64% decline in FX gains.

Meanwhile, Interest Expense grew by 24% y/y to  N121 billion, causing Net Interest Income to come in 53% higher y/y at  N250 billion, 9% above our estimate of  N230 billion.

On the cost side, impairments on loan losses grew by 24% y/y to N37 billion, 10% above our N33 billion projection. Meanwhile, Opex grew 15% y/y to  N264 billion and the bank’s cost-to-income ratio came in at a respectable 65.0% for the period, 85bps lower than in 9M’21. Overall, the bank reported a PBT of N105 billion, double that of 9M’21, while PAT was 123% higher y/y at  N91 billion.

Q3 performance driven by higher core-banking earnings

As has been the case with all other banks in our coverage, FBNH reported very strong core-banking earnings growth in Q3’22. Interest Income was 45% higher y/y at N144 billion, 23% above Q2 figure of N117 billion, while Interest Expense grew by only 19% y/y to N47 billion, albeit 29% higher than in Q2 (N37 billion). Overall, this meant that the bank saw net interest income increase by 63% over Q3’21 to  N97 billion, while improving on Q2’s performance by 21%.

However, it is important to note that the improvement in earnings was driven by loan book growth to a commensurate extent, as the higher rates during the quarter. The bank’s loan book expanded to N3.6 trillion, 25% higher than its year-open figure, with the bank adding 18% or ₦218 billion in Q3 alone.

As we anticipate a continuation of the high rates in Q4, we have raised our Interest Income projection to N507 billion (Previous: N463 billion) and Interest Expense to N167 billion (Previous: N156 billion), giving us a new Net Interest Income Figure of N339 billion (Previous N308 billion).

TP maintained

Despite our improved Interest Income figures, we have lowered our NIR forecast to N218 billion (Previous: N257 billion) on the back of the Q3 miss, while raising our FY impairments estimate to N48 billion (Previous: N46 billion).

All in, we maintain our FY’22 PAT projection of  N130 billion, along with an EPS of N3.60 and a final dividend projection of N0.50/share. Therefore, we maintain our 12-month Target Price (TP) of N12.24 and recommend a BUY rating on the stock. FBNH is currently trading at N9.10, 35% below our TP and at a P/Bv of 0.4x, compared to a Tier-I average of 0.5x.