FBN Holdings still towers above the rest of the banks in the industry by revenue but rising credit losses have robbed it of significant profit capacity this year. Impairment charges for credit losses made an upsurge of about 250% year-on-year at the end of the third quarter to stand at N46.64 billion. That has far exceeded the total impairment charges of N25.94 billion the bank made in the whole of 2014.
The ability to convert revenue into profit has therefore weakened for the bank this year. At the end of the third quarter, net profit margin dropped from 17.2% at the end of 2014 to 12.8% – the lowest among the leading banks. The bank’s profit margin hasn’t come this low in many years.
Interest expenses are equally hurting the bank’s profit capacity with an increase of 35.6% year-on-year in the third quarter. That is more than twice the increase in gross earnings, which led to a weak growth of 9.3% in net interest income. While the bank grew revenue by 17.2% year-on-year at the end of the third quarter, it lost 10% of net profit on account of rising loan losses and increasing cost of funds.
Revenue growth is expected to slow down in the final quarter and the full year outlook indicates gross earnings in the region of N524 billion for FBN Holdings in 2015. That will be an increase of 9% over the gross income of N480.62 billion it reported in 2014. It will however be a major slowdown from the revenue growth rate of 21.3% recorded in the prior year.
After tax profit dropped by about 10% year-on-year in the third quarter to N50.22 billion. Profit growth decelerated from N40.06 billion at the end of the second quarter due to loss of profit margin. Based on the current growth rate, FBN Holdings is expected to close the 2015 operations with an after tax profit in the region of N67.7 billion. This indicates a likely drop of 18.3% in after tax profit for the bank to the lowest figure since 2012.
Inability to get loan loss expenses and interest cost under control is the challenge facing the management of FBN Holdings in the current year. The two expenditure lines claimed virtually all the increase in interest income during the period. Impairment charges were already 80% above the N25.94 billion figure the bank made in all of 2014 by the end of the third quarter. The bank devoted 15.5% of interest income to impairment charges for credit losses compared to 5.2% in the same period last year.
At N107.46 billion at the end of the third quarter, interest expenses rose by 35.6% – more than twice as fast as the 17.5% growth in interest income. The bank also devoted an increased share of revenue to payment of interest expenses at 27.5% at the end of the third quarter compared to 24% in the same period last year.
Management succeeded in achieving a moderated growth in respect of operating expenses at the end of the third quarter. That enabled it to save some cost by reducing operating cost margin from 48.6% to 43.3% over the review period. The cost saved here was however absorbed by the two major rising costs.
The summary of the bank’s operations so far this year is that costs are growing generally ahead of revenue. Profit capacity has therefore weakened due to loss of profit margin. Net profit margin has dropped from 16.7% in the third quarter of last year and from 17.2% at the end of 2014 to 12.8% at the end of September this year.
Declining profit margin is a fact of the banking industry generally since last year but FBN Holdings has lost considerable ground on profit margin on the industry performance ranking. Its profit margin is a distant lowest among the five leading banks. This explains why it is leading the industry by revenue but struggling for a third space on profit numbers.
The bank earned N1.47 per share at the end of September, which is a decline from N1.70 in the same period last year. The full year earnings per share is projected at N1.88 for FBN Holdings in 2015. This means a likely drop from N2.55 earnings per share the bank reported at the end of 2014. An increase in the volume of shares from a bonus issue has reinforced the drop in earnings per share.