Business
FBN Holdings Plc – Remediating the past, reinvigorated to unlock value
Following our meeting with the Chief Executive Officer of First Bank Nigeria & Subsidiaries and consequently a detailed understanding of the bank’s medium term strategy, we have revised our medium term earnings projections upwards and our target price for FBN Holdings Plc (listed vehicle that owns Firstbank) to N7.34.
This presents an upside of 90.6% to the current price of N3.85. Hence, we upgrade the stock to a BUY rating. Please find below key insights from our meeting with management.
A strong commitment to performance – driven by a new breed of management
First Bank of Nigeria Limited recently filled the position of its Chief Risk Officer (CRO)
– after about six months long meritocratic process. The new CRO – Mr. Segun Alebiosu – a seasoned risk officer with significant exposure to qualitative risk management processes at African Development Bank, resumed just weeks after a new CFO – Mr. Patrick Iyamabo – former group CFO at FCMB joined the bank. The duo of Executive Director Corporate Banking (Dr Remi Oni) and Chief Information Officer, Mr Callistus Obetta has earlier been recruited from Standard Chartered Bank.
The Bank also appointed a Deputy Managing Director for the first time in its history. The new hires completes a new crop of executive management team led by Dr. Sola Adeduntan (FCA), most of whom have had first-rate experience in some of the best institutions in Nigeria and on the African continent.
A new First Bank – a different philosophy to doing business
We summarise this new philosophy in two words – quality and efficiency. The focus is on repositioning the bank’s risk process and improving efficiency to derive optimum value. Management has introduced additional approval/governance processes to credit origination and considerably tempered its risk appetite and tolerance limits. Emphasis is on quality at entry and portfolio diversification.
Deploying technology to drive transparency
First Bank is rolling out its First Shared Services (FSS) initiative to centralise back office operations for its in-country branches. When completed, would significantly improve transaction transparency, customer experience and operational efficiency.
Also, the bank is currently deploying the Oracle Enterprise Resource Planning (ERP) solution, to fully integrate its middle and back office functions. The reason is to rein
in cost by ensuring a centralized oversight on ‘thorny’ back-office functions such as
procurement, which is now directly under the CFO.
Pace of clean up slowing down, but some more to go
Between January 2016 and end of March 2017, FBNH has reported credit impairment charges of about N255 billion. By FY 2017, we estimate about N120billion in impairments charges. We believe this trend will slow by 2018 though NPLs will likely still be in the double digits (we project 13% from 26% currently).
Renewed faith in current management – we upgrade to BUY
With the pace of clean up in the last 5 quarters, we believe in the commitment of First Bank’s Board and management to reposition the bank’s balance sheet. We are
also convinced of the bank’s medium term strategy to deliver quality earnings and therefore upgrade FBNH stock to BUY.
Asset Quality Update: End in sight for asset quality problems
Total provisions for bad loans by FBNH since January, 2016 when the new management took over are about N255 billion. The aggressive provisioning has been a deliberate and expedient decision to clean the bank’s balance sheet and reposition the institution.
Non-performing loan (NPL) ratio over the past three years has trended from 2.9% in FY’14 to 24.4% in FY’16, with N418.5 billion worth of loans classified during this period.
The upstream and downstream oil & gas sector currently accounts for 29.6% and 34.7% of total NPLs respectively. Together, the upstream and downstream petroleum sector represent about 65% of nonperforming loans.
Atlantic Energy, the last man standing – Atlantic Energy loan (N145.6 billion) is the only non-performing loan in the upstream oil & gas portfolio. Management is optimistic that the resolution path is clear and will be resolved given its economic relevance (Atlantic Energy has 8 oil fields). It however acknowledged that government bureaucracies have slowed down the remediation process but expects the transaction to gain traction in the coming quarters. We believe Atlantic Energy loan will be remedied as management has indicated.
Pending the resolution, the bank may have to take additional impairments, which the bank has the headroom to absorb in our view. Given the prolific production capacity of the asset, we align with management on the recoverability. Considering the earnings capacity of the bank (as it absorbed over N240 billion in impairments without reporting a loss in FY’16), we highlight that FBNH has the capacity to provide for this asset if this becomes necessary.
Downstream asset quality to improve in Q3’17 – On the downstream portfolio, FBNH has made good progress on the remediation of its two biggest delinquent assets in the sub-sector. On the first asset, management has restructured the credit facility and has received the cash flow required to make interest repayment over the next two quarters. Hence, First Bank expects to reclassify the assets as a performing loan in Q3’17.
The reason for the lag in reclassification is to fulfill IFRS requirement, which requires that an asset must be performing for 6 months (2 quarters) before it can be reclassified. On the second downstream asset, management is in the final
stage of disposing off the collateral and expects the sale of the asset to yield material write back. . Management expects the resolution of these two big NPLs to moderate
its total NPLs by about 600bps this year while the write backs from the asset will also improve profitability.
First bank fortifies risk governance and management process
Risk governance – First Bank has strengthened its risk governance culture and changed its philosophy around credit origination and risk management. Beyond the
recent recruitments in Risk Management and Corporate Banking, First Bank has deliberately lowered its risk appetite in credit origination. The bank has also instituted a different risk governance structure by reducing approval limits across board and setting prudent limits across obligor, industry and also, the bank has changed its approach to credit origination under the new management.
The corporate banking team has been strengthened to entrench best practice in credit origination as the bank is now focusing on risk management from origination. This was the crucial reason for the recruitment of the Executive Director (ED) in charge of Corporate l Banking – Remi Oni, former ED for Institutional and Corporate Banking for Standard Chartered Nigeria and West Africa .
Risk management process – In addition to the existing centralized risk management process, FirstBank is currently deploying the Oracle Enterprise Risk Management (ERM) system. This is expected to further centralize risk management and enable management examine the interactions of risk exposures among the different entities of the bank. We consider this is a step in the right direction as the majority of the bank’s delinquent loans was a concentrated pool of obligors – just 5 obligors are responsible for about 70% of NPLs.
Furthermore, management also moved to improve risk management in its international subsidiaries through stronger oversight and strengthened governance. We believe the extra level of due diligence and the expected improved credit quality will strengthen the balance sheet of the bank First Bank also appointed a Group Executive, Mrs. Bashirat Odunewu, to supervise the subsidiaries to ensure compliance and appropriate governance. The key takeaway from our interaction with management, is that we noted significant improvement in the overall risk and control culture of the Bank and are convinced of the sustainability of the culture under the current management.
Management all out to boost efficiency
First bank’s cost-to-income ratio has improved substantially over the last two years, trending downwards from a high of 61.4% in FY’15 to 47.0% and 53.3% in FY’16 and Q1’17 respectively despite the strong inflationary pressures experienced in 2016.
The significant improvement in cost efficiency is partly enabled by the ongoing implementation of its First Shared Service (FSS). The FSS which is a giant data processing centre, is increasingly processing customers’ transactions across all First bank branches. The implementation of the FSS is eradicating the duplicity of roles across branches, standardizing customer service experience and also lowering the chances of fraudulent transactions. Management on the back of this implementation has seen the front office/ back office staff mix improve to 30%/70% in FY’16 from 20%/80% in FY’15.
This is expected to further improve to a mix of 50%/50% in the near term. Management is also currently working on integrating other subsidiaries (banking subsidiaries outside Nigeria) into the data processing centre. Like every other initiative of the new management, First bank recruited an IT and operations expert, Mr. Callistus Obetta, former group head of technology and operations at Standard Chartered Bank, West Africa, to lead and drive the FSS implementation.
Finally on cost control the Oracle software earlier mentioned, when fully implemented, will centralize procurement thereby assisting management keep a close lid on operating expense. This will improve cost budgeting and monitoring across various units.
Leveraging technology to consolidate back-end operations and drive transactional banking
First Bank intends to be a more transaction focused bank and hopes to leverage its digital banking platform to drive transaction revenue. The digital and electronic platform now currently accounts for about 47% of total banking transactions and management expects to ramp this up to 70% by December 2019. In September 2016, management enhanced the bank’s USSD (Unstructured Supplementary Service Data) banking platform and since then the bank has grown to become the bank with the second highest USSD transaction volume (about 200,000 transactions lower than the current market leader).
With this current rate of growth, management expects to be market leader by June 2017. First Bank has also been appointed as lead bank by 8 state governments planning to aggressively drive internally generated revenue (IGR) as the primary transactional bank. Management expects this development to further boost non-interest revenue going forward.
Strategic outlook
We believe in First Bank’s organic capacity to generate value from its assets. Over the next two years, we’ll likely start seeing impairment charges slow down. In addition,
the significant cut down in operating expenses (by eliminating certain roles) and improvement in the procurement process will unlock earnings growth. When this is placed in perspective with the bank’s strong franchise and reach in Nigeria, access to a huge retail pool, deliberate push in digital banking and stronger credit risk management process, we see significant value accretion from the bank’s current position in the medium term.
As seen below, the pre-impairment return on equity of FBNH is the second highest amongst tier 1 banks – which validates the strength of the bank to generate revenues. With a correction of its prior years’ anomaly of very high opex and poor risk management practice, we are convinced gross earnings will begin to filter down to strong earnings and shareholder value.
Also, on a relative valuation basis, FBNH is significantly undervalued with P/B of 0.2x compared to peers and Middle East and African banks average of 0.6X and 1.08%respectively.
While the huge discount on FBNH’s valuation may seem justified on the surface given currently high impairment charges and non-performing loan ratio, we believe the bank’ balance sheet is substantially cleaner than it was a year ago and thus a re-pricing of the stock is nearer than farther.
For strategic and value motivated investors, we believe this may be a good time to start buying FBNH as we envisage a significant re-pricing from current levels as impairment begin to normalize in the short to medium term.
Short term outlook
We expect interest income to rise by 12.7% to N456.6 billion in FY’17, driven by our expectations that yields on government securities will remain elevated during thecourse of the year. We see non-interest income declining by just 25.5% to N123.3 billion in FY’17, after adjusting for the impact of FX revaluation gains (N80.0 billion)and our estimate of the expected impairments write back (N20.0 billion) in Q2’17.
Overall, we expect gross earnings to contract slightly by 0.3% to N579.9 billion (after normalizing the impact of last year’s FX revaluation gains). If we normalize last year’s earnings, we actually expect 16% growth in gross earnings. We expect impairments charges to decline by 43.4% to N128.0 billion as management gradually wraps up its house cleaning in FY’17.
Given the traction seen in cost control measures, we expect operating expenses to inch up slightly by 4.9% to N231.7 billion, with a cost to income ratio of 52.0%. Finally, we expect after tax profit to surge by 332.2% to N74.1 billion, as impairments on bad loans moderate by about N100.0 billion.
Valuation
After incorporating our expectations of a significant decline in loan loss provisions as well as the higher earnings capacity of FBNH, we have revised our target price
upwards to N7.34. This presents an upside of 90.6% to the current price of N3.85. At current price, FBNH is trading at a P/B of 0.2X which is at a discount to peer average of Middle East and Africa banks average of 0.6X and 1.08X respectively.
Performance Review – FY’16 and Q1’17
Strong earnings growth in FY’16, continues in Q1’17– Gross earnings increased by 15.7% YoY to N581.8 billion in FY’16, driven by 69% YoY growth in non-interest income to N165.5 billion. The marked growth in non-interest income was spurred by foreign exchange revaluation gains (N89.1 billion) as well as higher income from fees & commission (+11.7% YoY). In Q1’17, gross earnings increased by 31.2% YoY to N141.0 billion but declined by 14.0% QoQ from N164.5 billion in Q4’16.
Further rise in impairments in FY’16, moderates in Q1’17 – Impairment charges were elevated, rising by 90.3%YoY to N226.0 billion in FY’16. Impairments also trended higher in Q1’17, rising by 126.0% YoY to N28.8 billion, (driven by provision taken in the bank’s UK subsidiary) but moderated on a QoQ basis declining by 74.5%.
After tax earnings grew marginally by 10.3% YoY to N17.1 billion in FY’16 despite the loss after tax reported of N25.5 billion reported by the group in Q4’16 following the aggressive impairment provisioning. Given the low base of impairment charges in Q1’17 earnings after tax declined by 22.3% YoY to N16.1 billion but was significantly better than the loss after tax made in Q4’16.
Strong capital position despite high NPL ratio – Non-performing loan ratio deteriorated to 24.4% and 26.0% in FY’16 and Q1’17 respectively from 18.1% in FY’15. Coverage ratio however improved to 57.3% and 58.8% in FY’16 and Q1’17 respectively from 40.2% in FY’15. About 71% of FBNH’s total NPL is concentrated in the oil & gas sector (34.7% in downstream, 29.6% in upstream and 7.1% in services).
Despite the high impairment and NPL ratio, capital adequacy ratio for the bank is well above regulatory limits, rising to 18.1% in Q1’17 from 17.8% in FY’16. The increase in CAR was driven by a significant decline of 1.5% in risk weighted assets.
Zacch Adedeji: And The Revenue Keeps Increasing By Rabiu Usman
By Rabiu Usman
It was President Bola Tinubu that declared that in the first half of this year, the revenue of Nigeria soared to over N9.1 trillion, compared to the first half of 2023.
For instance, N5.2 Trillion accrued into the Federation Account for the period January to June 2023, while a total of N7.3 Trillion accrued into the account for the period July to December, 2023.
However, for June this year, accruals into the Federation Account rose to N2.483 trillion in June 2024. It was N2.324.792 trillion in May, meaning for the two months of May and June this year alone, about N4.8 trillion accrued into the Federation Account while N5.2 trillion accrued into the account for the first six months of last year.
The President attributed the revenue increase to the government’s efforts in blocking leakages, introducing automation, and mobilizing funding creatively, all without placing an additional burden on the people.
A few days after the President spoke glowingly of the considerable increase in the revenue of the country, a process being powered by the Federal Inland Revenue Service (FIRS), under the Chairmanship of Dr Zacch Adedeji, the Nigeria’s Zaccheus the Tax Collector, the World Bank also confirmed the progress being made in the area of revenue generation.
The World Bank projected that following the recent increase in government revenue, Nigeria’s revenue-to-GDP ratio could rise to over 10.5 percent by the end of 2024.
Ndiamé Diop, World Bank country director for Nigeria shared the forecast during an interactive session on ‘Fiscal Reforms for a More Secure Future’ at the 30th Nigerian Economic Summit, held in Abuja last month.
Also, according to data released in September by the National Bureau of Statistics (NBS), Nigeria’s Value Added Tax (VAT) revenue increased by 99.82% year-over-year in the second quarter of 2024.
During this period, total VAT revenue reached N1.56 trillion, a 9.11% increase compared to the previous quarter.
The NBS report highlighted that the revenue growth was driven primarily by local payments, which brought in about $484 million, while foreign payments contributed $242 million. VAT on imports generated $228 million.
However, despite the level of progress already made, the FIRS under Dr Zacch Adedeji is not done yet.
Various innovations are daily being introduced to ensure seamless payment of taxes by Nigerians.
Last week, the Taxpayer Services Department of the FIRS launched the new USSD code *829#, aimed at revolutionizing taxpayer engagement and access to essential tax services.
According to the FIRS, the initiative was aimed at “simplifying tax processes and providing a seamless, efficient service experience.”
With the *829# USSD code, taxpayers can now effortlessly access a range of services, including TIN retrieval, Tax Clearance Certificate (TCC) verification, and general inquiries all from the convenience of their mobile phones and with no need for internet access.
Also, Zacch Adedeji is everywhere, explaining the four tax bills currently before the National Assembly, assuring that it will not reduce the funding or operational efficiency of government agencies.
Last week Wednesday, Adedeji addressed the heads of the National Agency for Science and Engineering Infrastructure (NASENI), the National Information Technology Development Agency (NITDA), and the Tertiary Education Trust Fund (TETFUND) at the Revenue House in Abuja. He allayed concerns surrounding the proposal to rename the FIRS as the Nigeria Revenue Service (NRS), clarifying that the change is intended to streamline and improve agency efficiency.
He said the main goal was to align government revenue practices with current fiscal demands to ensure all agencies are well-funded and effective.
Adedeji further highlighted that the proposed legislation would enable government agencies to concentrate on their core responsibilities without the added task of revenue collection.
“The bills, once enacted, will allow agencies to focus on their primary functions instead of managing tax collection duties,” he explained.
Adedeji, who appears to have taken up the job of an Explainer concerning the new tax bills, further pointed out that the bills were the aftermath of President Tinubu’s administration recognition of the need for a unified tax code to reduce complexity and stimulate economic growth.
Perhaps, by the time this is being read, Dr Zacch Adedeji, will be standing before another audience to explain the ideas behind the new tax bills and their capability to further sore up the revenue base of the country, because for him, the revenue must keep increasing.
Usman, a public affairs commentator lives in Abuja.
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