FBN Holdings (FBNH) performance in 2019 showed improving asset quality. However, high Operating Expenses resulted in a deterioration in Cost to Income Ratio (CIR ex-provisions) to 70.0% compared with 63.7% in 2018 was a major drag to earnings. In line with Management’s guidance that majority of the costs were one-off, we saw an improvement in CIR to 65.1% in Q1 2020. Adjusting for the one-off expenses, cost savings from COVID-19 restrictions and accounting for reduced operating income on the back of COVID-19, we forecast CIR declining to 65.0% in 2020e.
The bank’s asset quality ratios continue to improve with Cost of Risk (COR) moderating to 1.9% in Q1 2020 compared with 2.6% for FY 2019 and NPL ratio coming down to 9.2% from 9.9% in FY 2019. Though we expect a strain in FCY loans following the reduction in oil prices and elevated risks to devaluation in the local currency, we expect that many of such loans will be restructured and their tenors elongated in the near term. We however believe we will see some deterioration in the loan book because of the effects of the pandemic on many businesses and consumer pockets. This makes us model COR of 2.5% for 2020e.
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Capital Adequacy Ratio (CAR) of 15.3% (without the full impact of IFRS 9) was reported for FBN Nigeria in Q1 2020, almost at par with the regulatory limit of 15.0%, implying the bank will continue to retain capital aggressively to avoid external capital increase in the near term. Without significant deterioration in asset quality, which we believe is unlikely in the near term, we believe the bank can struggle to remain above water considering its net long FX position and expectations of revaluation gains to cushion the effect of further devaluation on capital. As of FY 2019, FBNH had a net long FX position of c.US$398.2m.
We have made slight changes to our estimate, with the overall effect being a slight change to our price target which reduces to N11.07/s from N12.13/s previously and we retain a Buy recommendation. At 0.27x price-to-book (P/BV), valuation remains compelling and though we expect income growth to be challenged owing to the Covid-19 pandemic and the fragile economic conditions, we see no major disaster in view.
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