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First Bank: Revised investment forecast put to test

By Emeka Anaeto, Business Editor

Despite the bullish investor sentiment at the backdrop of upwards review of Target Price (TP) by investment analysts, it seems that a rebalancing in the pricing of the stock of First Bank of Nigeria (FBN) Holdings has begun.

But not before the investors had reaped bountiful returns in price appreciations recorded on the heels of a seemingly impressive 2017 third quarter/ nine months results of the banking group.

Oba Otudeko

The upsurge in the price had come after three trading days of lack-luster reaction to the bank’s 9-month financial results which saw the stock price in a temporal 0.8 percent appreciation, and it lost the gains the next trading day.

Though the bulls took over from first week of November the trend was bucked at close of trading previous Friday and sustained a reversal last week. By close of trading last week the stock had pulled back its Year-to-Date, YoY, returns from a high of 135.5 percent post-9month results to 125.5 percent, a development some stockbrokers were not particularly surprised at. They had expected profit-taking to ensue on the heels of the massive jump in the price early November, even before the stock price could hit the post-9months results TP projections of above N8.00.

•U.K Eke, MD/CEO, FBN Holdings
•U.K Eke, MD/CEO, FBN Holdings

But many stock analysts believe the bank still holds good fundamentals that may have warranted the upsurge in investor sentiment despite the flip-flop investor sentiment that had trailed corporate results announced for 9M’17. How credible this analysts’ position is would be tested this week.

The 9-months 2017

Inherent in the bank’s 9M’17 results are some of the factors driving investors’ behaviour towards the stock.

First, despite the high base of prior year, gross earnings rose by 5.6% YoY to N441.4 billion on the back of sustained growth in interest income (+27.8% YoY).

Quarterly, profit after tax, PAT, went up by 22.6% to N16.4 billion, buoyed by a growth of 32.4% quarter-on-quarter (QoQ) in non-interest income.

Impairment charges is on positive trajectory, declining 14.9% YoY to N97.6 billion while it rose marginally by 4.7% QoQ. Conversely, NPL ratios improved further to 20.1% in Q3’17 from 22.8% and 26.0% in Q2’17 and Q1’17 respectively, as the bank wrote off previously provisioned NPLs.

However, noteworthy is the 90.08% YoY growth in net recoveries from loans previously written off (with an additional recovery of N1.32 billion over Q3) which financial analysts believe reflects the gradual improvements in the general commerce and manufacturing sectors following increased FX liquidity.

Whilst net loans declined marginally by 1.9% to N2.0 trillion, total asset and net asset increased by 2.7% and 20.7% to N4.9 trillion and N631.1 billion respectively in 9M’17.

Further analysis show that the growth in earnings was aided by growth in funding income which increased by 7.73% QoQ and 17.43% YoY, and this more than subdued the 6.57% and 37.91% YoY contraction in NIR.

Also the earnings performance is seen to be aided by a declining operating expenses, OPEX, which dropped by 3.51% QoQ, though it ticked up 2.27% YoY.

First Bank reported capital adequacy ratio (CAR) of 17.8% for the bank in full year 2016 and 17.6% for first half 2017. Though relative to both periods, CAR contracted to 17.2% in 9M-17, this is still largely above the required regulatory minimum of 16% for systemically important banks.

Expectations for FY’17, revision of estimates

The largely positive sentiment on First Bank’s stock is premised on the bank’s good brand equity and recovering financials. But many financial analysts see the financial sector still challenged with many of the operators expected to remain in elevated interest expense as liquidity pressure persists. Added to this is the US Feds rate hike impact on the London Interbank Offer Rate (LIBOR) expected to further compound the already stretched interest rate.

On First Bank, analysts at Cordros Capital, a Lagos based investment house, stated: “While the performance over 9M-17 is broadly in line with our estimate, we have now revised estimate for Q4 and FY-2017 upward to reflect the relative consistency over the first three quarters of 2017, compared with same periods in 2016.

“We revise gross earnings growth forecast slightly higher to 0.81% (previously -4.63%) in 2017F to N586.54 billion, on expected higher growth in interest income and a lower contraction in NIR.

“While we maintained our 2017F costs or risk estimate, we have lowered net loan growth estimate by 8.76%. As a result, we now forecast PBT and PAT growth of 107.87% and 214.18% (previously 51.78% and 51.74%) to N65.92 billion and N53.85 billion respectively. As a result, our 2017F EPS of N1.50 is now 107.06% higher than the previous estimate of N0.72.

“We revise asset yield estimate for 2017F higher to 12.45% (previously 11.65%), on expected continued elevated yields on interest earning assets over Q4 (expanded 210 bps y/y to 12.28% in 9M-17).

“Overall, we look for interest income growth of 17.88% (previously 12.38%) to N477.76 billion. On NIR, we believe the growth in net insurance revenue, dividend income, and other operating income will persist for the rest of the year. However, we expect a significant contraction in foreign exchange – reflecting the limited legroom for revaluation gains in 2017 with the relative stability of the NGN –, as such, we have lowered the expected contraction in NIR to 45.41% (previously 51.63%).

“While we acknowledged the moderation in interest expense in Q3, it has increased 34.45% over 9M-17, with cost of funds expanding 80 bps to 3.50%. We have revised our 2017F cost of funds estimate higher by 16 bps to 3.85% (+62 bps y/y), translating to 31.54% growth in interest expense to N132.64 billion.

“However, with the upward review of the high yields on interest earning assets, we believe the impact of the expansion in cost of funds will be muted, thus, we estimate net interest margin to decline 13 bps to 8.72% (previously 8.49%).

“On net, we revise our target price on the stock higher to N7.38 (Previous: N6.41) and roll forward our valuation to 2018F.

“Our current 12-month TP implies upside potential of 12.83% from current levels; consequently, we recommend a HOLD on the stock.”

Generally, analysts have opined that despite the continued mixed sentiment across some key sectors, the stock market will remain bullish this week.

However, on First Bank specifically, analysts at Vetiva Capital, another Lagos based investment house stated:  “After gaining 15 per cent over three consecutive sessions, First Bank Nigeria Holdings, FBNH declined 84 bases points, bps  today (Friday) . The stock currently trades at ¦ 7.05, below Vetiva target price of ¦ 8.64, and has returned 101 per cent, Year to Date,  YtD.

“We note that the company released its  nine months, 9M’17 results, reporting better than expected performances across most key line items with top and bottom lines coming in 6 per cent  and 8 per cent  stronger  Year on Year.” Previous week, Vetiva recommended First Bank as one of the stocks to watch.



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