Analysts at Renaissance Capital Limited (RenCap) have downgraded the holding company’s numbers to ‘sell’ from ‘hold’ after they reviewed the bank’s 2015 Half Year results
The firm stated in a report yesterday that its decision was based on FBNH’s weaker year-end 2015 guidance, driven by rising asset quality risks.
“Among a number of changes to FBNH’s 2015 guidance, one that stood out to us was the significantly higher cost of risk (CoR) guidance of 3.5 per cent, from 1.5 per cent previously. We have made marginal changes to our numbers but the sharply higher impairment charge reduces our full year 2015 estimate profit before tax and profit after tax forecasts by 52-53 per cent (to a 52-57 per cent year-on-year decline) and we now forecast return-on-equity (RoE) and return-on-asset (RoA) of 6.7 per cent and 0.8 per cent, respectively, versus 14 per cent and 1.7 per cent previously. “The weaker asset quality guidance was largely attributed to collective impairments, delayed salary payments to government workers and contractors, and risks to general commerce given the weaker macro and currency concerns,” it stated.
Atlantic Energy Factor
“We conservatively assume that the bank’s exposure to Atlantic Energy, which was last put at c. $400 million is a key driver. Management said there has been no improvement in the asset since the previous conference call and it remains watch-listed.
“If management is proactively setting aside collective impairments on Atlantic, we think this is a good move, given the negative publicity around the name. Should the asset not perform, as we conservatively assume, this would mean there should be minimal additional profit and loss impact. By raising CoR to 3.5 per cent, additional provisions should cover 71 per cent of the exposure in a best-case scenario, on our estimates,”
As usual, a Caveat
However, the report noted that its forecast on the financial institution might be wrong if the monetary policy committee decides to remunerate banks on cash reserve balances; material one-off gains from disposals of non-core investments; as well as a relaxation of forex trading rules. In addition, it noted that writing off NPLs could help offset the headline impact of classifying Atlantic exposure and the impact of states’ bailout using FGN bonds on margins and after-tax earnings.
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FBN Holdings last Wednesday unveiled its financial results for the half year ended June 30, 2015, showing profit before tax of N52.1 billion. A breakdown of the half year performance had shown that FBN Holdings grew net interest income by 15 per cent, from N115.1 billion in 2014 to N132.7 billion in 2015. Impairment charges soared by 239 per from N6.66 billion to N22.6 billion. Personnel charges followed the same trend, rising by 23 per cent from N38.7 billion to N47.5 billion, while operating expenses grew by 10 per cent from N58.1 billion to N64.2 billion.
Consequently, the growth in operating profit was reduced to nine per cent to be at N52.1 billion, compared to N47.7 billion recorded in the corresponding period of 2014.