The Banking industry have been faced with multifaceted challenges over the last decade. Banking consolidations, Universal Banking, Margin Loans, Banking Tsunami, Stock Market crash, Break up of Universal banking, increased regulations etc. They have faced many many battles, won some and lost many.
- First Bank is one of the most recognised financial institutions in Nigeria with a track record spanning decades
- Their financial statements and historical span many years from precolonial Nigeria to Post Military Rule. History also shows a company that has consistently made profits and paid dividends
- They have vast customer deposits of about N2.7trillion and should cross the N3trillion mark within the next 18months
- They recently obtained tax waivers as a Hold Co which helps eliminate or reduce the risk of multiple taxation.
- Capital Adequacy ratio is above 20% and above CBN limit of 15%.
- Subsidiaries such as the Insurance Business, Investment banking and asset management were all profitable at the end of 2012 FY
- There are opportunities for its smaller subsidiaries to grow and add significantly to bottom line
- Current share price has a P.E ratio of 7x and a Price to book ratio of 1.2x.
- The Holdco system ensures that risk from its major subsidiary company First Bank Plc cannot be transferred to the other subsidiaries and vice versa
- The company’s shares are very liquid and easily tradable
- The operations of the Bank is very large and labels it as “Too big to fail”
- Shareholder value can be significantly impacted upon if the major subsidiary, First Bank faces a financial crisis.
- The Group is very large and lacks the nimbleness required to wiggle through the every dynamic financial services sector
- High operational cost and vulnerable to inefficiencies
- The banking sector is highly regulated making aggressive loan a very difficult task
- Share price will continue to be under pressure and largely depend on the wider economy to appreciate
- The current average share price (N16.5) still creates a huge upside for potential buyers as it represents a P.E ratio of 7x and a Price to Book ratio of 1.2x.
- Earnings Per share is also expected to increase by at least 21%, which even pushes the P.E ratio further down to 5.8x
- The price to earnings ratio is also trading at a discount of 55% of the All Share Index indicating an upside and that it is in fact not over priced.
- Though cost to income ratio is high at 65% because the bank currently makes a larger chunk of its operating income from Net interest income. Therefore, an aggressive push into other sources such as commission and fees can help improve its subsidiary bank’s bottom line
- FBN Life, one of its subsidiary has pushed some interest Insurance products that appeals to the poor. For example, there is an arrangement they have with Airtel where all you need to is deduct N20 from your recharge card to pay for Insurance that can benefit as much as N500,000. This is a potential for premiums which the bank can put to better use.
- Their position as Nigeria’s number one bank is evidently under threat by Zenith Bank and GTB.
- In fact GTB and Zenith Bank both post better results last year and Zenith in particular has even crossed the N2trillion deposit base.
- The recent increase of banks CRR posses short term risk for the bank especially as it strives to improve its income from other sources
- The stock market is still a fragile place to invest and as such a “w” shaped curve for the stock is very likely.
- Holding company structure is still fairly newly for the company and posses a lot risk. There will be mistakes made along the way and lots of poor decision making that could even lead to a break-up
- The cyclical effect of loan write offs will surely remain. This could affect future profits and dividend payouts.
Buy, Sell or Hold
My SWOT analysis suggest a Company that is sound and stable considering my long term investment outlook. The current share price looks appealing to me and therefore a buy.
I instructed my stockbroker to purchase FBN Holding Shares on my behalf.[/upme_private]