FBN Holdings Needs to Check Rising Impairments

The board and management of FBN Holdings need to work harder to check rising impairment charges so that the bank can regain investors’ confidence and reclaim its leadership position writes, Goddy Egene

FBN Holdings Plc recorded the highest gross earnings for the 2016 financial year, showing its leadership position in the banking industry in that area. The financial institution, through its commercial banking subsidiary, First Bank of Nigeria Limited, is regarded as the dominant player in the retail banking space. That leadership was confirmed through the level of gross earnings FBN Holdings Plc recorded for the year ended December 31, 2016. The bank posted gross earnings of N535.5 billion. Zenith Bank Plc followed with N507.9 billion, while Guaranty Trust Bank Plc recorded N414.6 billion.

However, the huge gross earnings could not translate into profit due to high impairment provision for loan loss. Although all the banks recorded higher impairment charges, some of them still managed to end the year with significant bottom-lines and returns to shareholders.

But FBN Holdings posted a profit after tax of N17.1 billion, which is regarded as too low considering the level of gross earnings. Hence, market operators believe FBN Holdings needs to work on reducing its impairment charges in the years ahead so as to be able to return to the top in terms of profitability, dividend payment and other performance indicators.

Financial Performance

FBN Holdings posted gross earnings of N581.8billion in 2016, up 15.7 per cent from N505.7 billion in 2015. Net-interest income grew by 14.8 per cent from N265.2 billion to N304.4 billion, while non-interest income grew faster by 68.9 per cent from N97.9 billion to N165.5 billion.

Similarly, operating income rose by 29.4 per cent from N363 billion to N469.9 billion. However, impairment charges surged by 90 per cent to N226 billion in 2016, from N118.8 billion in 2015.

Consequently, FBN Holdings posted a profit before tax of N22.9 billion, up 6.3 per cent from N21.6 billion recorded in 2015, while PAT stood at N17.1 billion, indicating a growth of 10.3 per cent from N15.5 billion in 2015.

Commenting on the results, the Managing Director, FBN Holdings, UK Eke said: “2016 has been a year characterised by significant uncertainty in the operating environment. Despite this, FBN Holdings has delivered a solid performance while focusing on addressing the pre-existing issues in the loan book which resulted in the current loan loss. This performance has been achieved through ongoing initiatives in driving efficiency across the various businesses, transforming the risk management and control environment, containing cost, as well as enhancing revenue generation from the banking and non-banking subsidiaries. We expect an improved economic environment through 2017 and are confident that the foundations we have put in place will drive improved financial performance and consequently enhance shareholder returns.”

Speaking in the same vein, the Managing Director/CEO of First Bank and subsidiaries, Dr. Adesola Adeduntan said: “The commercial banking group has delivered a robust performance with a 15.6 per cent growth in gross earnings to N535.5 billion in a challenging operating environment while addressing the quality of the asset portfolio and overhauling the group risk management governance and architecture. During the year, we strengthened leadership in key business areas ensuring we have the appropriate skillset in place to drive us forward. We remain resolute in our commitment to transform the bank’s risk management approach towards sustainable improvement in asset quality, enhancing the revenue generation capacity of our business and optimising costs. In all, we will ensure profitable growth of the group leveraging technology to drive innovation as we position for improved performance.”

The Positives

A further analysis of the results showed some positive performance. For instance, cost of funds improved to 2.8 per cent as against 3.7 per cent in 2015, indicating better efficiency in pricing. While blended cost of borrowings increased to 6.6 per cent from 5.3 per cent in the prior year, blended cost of bank and customer deposits declined to 1.2 per cent and 2.6 per cent from 6.6 per cent and 3.5 per cent respectively. Average yield on assets declined marginally from 12.1 per cent to 11.7 per cent by 2016 year end. As a result, net interest margin increased to 8.8% from 8.1% in the prior year.

Also, non-interest income increased by 68.9 per cent to N165.5 billion, from N97.9billion in 2015, contributing 35.2 per cent to net revenue, compared with 26.9 per cent in 2015.

“The increase in non-interest income can be attributed to the foreign exchange translation gain as well as an increase in fees and commission income. Foreign exchange income for the year increased to N89.1 billion ( N22.2 billion in 2015), representing 53.8 per cent of non-interest income (22.7 per cent). The revaluation gain arose from exchange rate movements on the Group’s long foreign currency balance sheet position as at reporting date,” the bank said.

The bank’s operating expenses declined by 0.8 per cent to N220.9 billion, from N222.7 billion despite the high inflationary environment.

“This demonstrates the success of our cost optimisation initiatives which resulted in increased operational efficiency of our business and in a decline in: regulatory costs, advert and corporate promotions, directors remuneration, legal and professional fees , net insurance claims, amongst other several cost line declines,” it said.

Another improvement recorded by FBN Holdings was in the area of cost-to-income ratio, which improved to 47 per cent, from 61.3 per cent in 2015, following strong operating income growth and a sustained decline in operating expenses.

“Current improvement has been achieved largely through entrenched discipline in budget and procurement, optimising manning levels across functions and other conscious cost containment measures of the Group. We remain resolute in our commitment to further enhance our efficiency level,” it said.

Similarly, total assets increased by 13.7 per cent to N4.7 trillion, from N4.2 trillion in December 2015. Total customer deposits rose by 4.5 per cent from N3.0 trillion to N3.1 trillion in 2016, total loans and advances to customers (net) increased by 14.7 per cent to N2.1 trillion, from N1.8 trillion), driven by the translation effect of the Naira devaluation. As a result, FCY loans now constitute 51.1 per cent of the loan portfolio compared with 44.7 per cent in 2015.

Shareholders’ funds closed at N582.6 billion, up 0.7 per cent from N578.8 billion, benefitting from revaluation gains of N26.7 billion, taking foreign currency translation reserves to N34.8 billion ( N8.0 billion in 2015) as well as statutory credit reserve of N21.2 billion, closing at N23.6 billion.

Capital adequacy ratio for First Bank (Nigeria) closed at 17.8 per cent, which is above the current regulatory minimum of 15 per cent, while tier 1 ratio was 13.97 per cent (2015 13.3 per cent in 2015).

The Negatives

The major negative performance recorded by FBN Holdings is the high impairment charge on credit losses, which amounted to N226, up from N118.8 billion. The company explained that the impairment charge was largely driven by the translation effect of the foreign currency portfolio due to the Naira devaluation as well as one-off exceptional credit charge from legacy exposures in subsidiaries.

“Credit losses are predominately driven by the oil and gas sector exposures and to a lesser extent real estate/residential mortgages, general commerce and the general sectors. As a result, Cost of risk increased to 10.4 per cent, compared with 5.7 per cent, while non-performance loans (NPL) ratio closed at 24.4 per cent, as against 18.1 per cent in 2015.

According to FBN Holdings, they have remained focused on remediation and recovery activities towards declassifying non-performing accounts and driving asset quality improvements.

“In line with this, we have made significant progress on remediation and recovery of NPLs in the last nine months. One of the three major accounts contributing to the NPL has been fully restructured and will be reclassified as a performing loan in 2017 in line with IFRS guideline, while asset realisation is at advanced stage on the second material NPL. Resolution on Atlantic Energy has taken longer than expected but despite the delays, we are confident in achieving a positive outcome in the near future,” the bank said.

Also, FBN Holdings gross margin fell from 2.9 per cent in 2015 to compared with 3.1 per cent in 2015, a major indicator that should be worked on the current financial year.