First Bank Nigeria Limited

While I would never understand why any investor would put his hard earned money in a stock like FBN Holdings, for those that are even remotely considering it, Renaissance Capital came out last week with a sell rating on the bank.

Reasons for the ratings are explained below by Rencap:

Inadequacy of provisions: 37% total coverage is too low

  1. NPL coverage is simply too low and from our discussions with the CBN; we understand this is so because the NPLs were only classified in 4Q15. Therefore, when the CBN next conducts its supervisory checks in June, if these loans are still non-performing, the NPL classification could get stepped up to doubtful (50% provisioning) and to lost (100% provisioning) if status quo remains by year end.

It’s important to note that these NPL buckets only apply under GAAP which the CBN still applies. Under IFRS reporting, collateral will be considered and where CBN provisioning requirements exceed IFRS, the excess will be moved to the non-distributable non-capital qualifying regulatory risk reserve under equity. In 1Q16, regulatory risk reserves were only NGN2.4bn, down from NGN46.7bn in 9M15.

Another related asset quality concern is that 56% of the bank’s NPLs are FX, which implies that if a devaluation occurs, coverage levels would fall, with the bank needing to set aside more naira earnings to cover these greenback NPLs. In light of this, it is quite difficult for us to get comfortable with a coverage ratio of 37%.

Capital adequacy concerns: $700mn-$1bn potential capital need

The adequacy or not of the bank’s capital remains an ongoing debate and our view remains that it is inadequate. 1Q16 CAR was reported at 17% but with NPL coverage of 37% and 56% of NPLs being FX. If we assume the bank raised coverage to 100% in FY15, CAR would have fallen to 10%, with tier 1 CAR at 6%. We estimate that to reach a 16% CAR (effective 1 July 2016), the bank would need NGN140bn/$700mn, and to reach 18% (2-ppt buffer), it would need to raise NGN206bn/$1bn.

These are significant amounts and our discussions with the CBN suggests that it has not given FBNH any forbearance on NPL provisioning, which means the risks to reported CAR could materialize quite quickly depending on the results of CBN’s next audit in June.

To support CAR, management continues to de-risk the balance sheet and loan/assets has been reduced to 62% in 1Q16 from 71% in FY14. At this rate, within 12-18 months, FBN risks losing its position as the largest bank to Zenith, which already has a larger net loan book and quite close on a few other scale metrics. This should be less of a concern to equity investors as the more important issue should be that asset quality and capital issues are firmly addressed. On the call, management reiterated that it does not plan to raise tier 1 capital anytime soon given market conditions.

Maintain SELL and reduce TP to NGN3.0
Using our scorecard for the new CEO to appraise the results, we think a number of right steps are being taken but there is still some way to go. We adjust our forecasts, and are most confident on cost improvements, as asset quality and revenue evolution remain fluid. We maintain our SELL rating and lower our TP to NGN3.0 (from NGN3.3), on our revised estimates.

FBN Holdings closed at N3.50 a share on Friday, meaning if the RenCap thesis is right, this broken stock still has a long way to fall!



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