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First Bank: Analysts recommend strong buy as investors’ bandwagon push in opposite direction

…2017 result speculations to determine fortune this week

By Emeka Anaeto, Business Editor

AT the backdrop of a heart-warming projections by a reputable institutional analyst, investors’ bear bandwagon appeared too strong on the stock of First Bank of Nigeria Holdings Plc (FBNH).

The stock, which has been one of the best performing in the past one year, succumbed to a market rebalancing last week posting 11.8% decline so far in February. In deed against the peak performance this year at N14.75 the closing price last Friday at N12.30 shows a 16.6 % regress. It had gotten to a peak loss position of 21.7% mid last week before a recovery on Thursday.

Ibukun Awosika, Chairman, FBNH

But the stock, riding on the last month’s bull bandwagon, had posted one of the most impressive returns so far this year with investors coasting home on 58.7 % capital appreciation in January alone.

By early this month market sentiment, which principally, drove the bear run, had waned leading to significant retreats in many stocks including FBNH.

However, analysts at ARM Investment Ltd, a Lagos based investment banking firm, have turned a positive flip side to the stock valuation and possible pricing module for the foremost financial establishment. Analysts at the firm have posited that following the dramatic share price decline FBNH looks increasingly attractive underpinned by improving asset quality and above par core banking metrics.

Operational efficiency

They see further potential upside from lower provisioning, resilience in Net Interest Margin (NIM), operational efficiency and possible streamlining of branches.

Consequently, they estimate full year 2017 (FY ‘17E) earnings per share (EPS) of N1.72 as against N1.28 recorded in its nine-month 2017 financials.

The actual result is expected to be announced any moment from this week.

FBNH’s records

Over the last 11 quarters, the bank booked N442 billion on loan loss provision stemming from deteriorating loan quality with Non-Performing Loan (NPL) ratio and Cost of Risk (CoR) at 25% and 10.8% respectively as at FY 2016 as against 18.1% and 6.1% in FY 2015.

ARM says much of the provisioning stemmed from concerns on its exposures to Oil & Gas, ICT and Manufacturing sectors with Atlantic Energy, 9mobile, Oando, amongst others posing specific risk to loan quality.

However, over the first nine-months of 2017, asset quality has recovered with NPL and cost of risk declining to 20% and 6.4% respectively.

ARM says much of the improvement has come from the downstream oil and gas sector where NPL concentration declined to 11% in 9M 17 from 35% in FY 16.

The bank had achieved noteworthy progress with regards to the remediation of its two largest delinquent assets in the subsector. The Management had also noted that it has restructured the credit facility and received cash flow required to make interest payments over 2017. Consequently, the bank reclassified the assets as performing in the third quarter.    Analysts’ positions

Sola Adeduntan, MD, First Bank of Nigeria Limited.

Against these backdrop the analysts at ARM stated: “Going forward, we expect to see sizable improvement from its upstream Oil and Gas (O&G) exposure which currently constitutes 43% of NPL as at 9M 17. Given the recovery in crude oil production and higher crude oil prices, we expect upstream O&G NPL to moderate to 30% in FY 18.

“Atlantic Energy loan, of   N140 billion, is expected to remain the major NPL in its upstream Oil &Gas books. On that front, though management is optimistic on a possible resolution even as assets (8 oil fields) remains productive, government delays has informed our cautious view on NPLs reclassification.

“Furthermore, we expect the collateral of dragging downstream assets to be disposed, which supports further contraction in downstream NPLs.

“Elsewhere on 9mobile and Oando, the resolution of 9mobile’s debt is progressing well. The infrastructure of the business is quite modern being the last of the licensed Telcos with significant interest from a number of investors.

“In addition, the business has not significantly lost customers and its revenue remains very strong. We expect conclusion of sale by YE 2018. Oando is essentially an ownership dispute. The operational activities of the business have not been curtailed by any means.

“Similarly, we do not expect any significant impact on Oando’s capacity to meet its obligations. Notwithstanding, FBNH’s exposure to 9mobile and Oando is relatively low at 1.25% and 0.05% of the bank’s loan book respectively.

“While the prospect of reclassifying NPLs to performing loans guides to a possibility for write-backs, we note concerns on exposure to manufacturing, trade, and real estate.

“Excluding asset quality concerns, FBNH core banking metrics remain above peer average with key metrics pointing to sustained momentum. Central to core performance is the robust contribution of higher asset yields to interest income and lower funding cost to expansion in Net Interest Margins (NIMs).

“On asset yields, despite our expectation of a 200bps decline in yields on investment securities, the largely sticky nature of interest rate on loan books should moderate the impact of a lower yield environment. “Accordingly, we forecast asset yields of 15% for 2017E and 2018F, and an average of 14.8% for the period 2019F-2021F. Overall, we forecast NIMs of 10.7% for 2017E and 2018F.  ”

ARM analysts say Management’s aim here is to protect NIMs, leveraging on its low-cost funding structure even as it remains focused on optimizing income from interest earning assets while further driving increased non-interest income contribution. On the latter, they added, Management noted that the bank has 13 million active customer accounts with at least 80% of the customer induced transactions done on its digital platform.

FBN has at least 35% of all electronic traffic in Nigeria either by count or value on the Interswitch platform and remains the only bank to process over 100million transactions per month on the Interswitch platform multiple times. The bank is currently setting up a digital lab to further drive innovative solutions.

Operational efficiency

Operational efficiency at FBN has been upbeat with Cost to Income ratio (CIR) in 9M 2017 of 53.4% lower than its 5-year average (excluding 2016 where FX-induced income drove CIR lower to 47%).

ARM stated further: “We now estimate FY 17E OPEX (Operating Expenditure) of N230 billion as against the nine-month 2017 actual of   N175 billion. Further out, we forecast a 3% average growth in OPEX over 2018F – 2021F.

“The foregoing, alongside our gross earnings forecast guides to relatively flattish CIR over our forecast period. To note, management guides to a possible review of some branches as the bank is currently piloting the agency banking model.

“In summary, with a focus on leveraging lower funding cost, operational efficiency, adequate capital buffer, no plans to grow risky assets, and lower loan-loss provisioning, downside risk to 2018 earnings now seems moderated than was earlier expected.

“Overall, we forecast 2018F EPS of N3.18 (+85% Year-on-Year) and DPS (Dividend Per Share) of N1.43. Furthermore, at current pricing, its 2017E dividend translates to dividend yield of 6.4%.

“Our FVE of  N16.69  translates to a 32% upside from current pricing. Consequently, we rate the stock a  ‘STRONG BUY’, reflecting attractive valuation and a view that fundamentals will improve going forward.


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