In this times when lenders in Africa largest economy are groaning under the tough operating environment caused by the monetary policies of the Central Bank, First Bank Nigeria Holdings Plc however have surmounted these headwinds as it recorded a tremendous growth in earnings.
Increased gross earnings driven by interest income.
Gross earnings increased by grew by 28.0 percent to N271.30 billion as at June 2015 compared with N212.0 billion in June 2014. The double digit growth in gross earnings was driven by a year on year (y-o-y) 15.80 percent increase in interest income from loans and advances to customers, banks (+56.1 percent y-o-y) and investment securities (+49.1 percent).
Interest income rose by 24.83 percent to N205.79 billion in June 2015 as against N164.85 billion as at June 2014. Net interest income jumped by 15.26 percent to N132 billion in June 2015 compared with N115.20 billion the same period of the corresponding year 2014.
Non Interest Income increased by 61.20 percent to N43.2 billion in June 2015 compared with N41.7 billion in June 2014. The growth is as a result of increased credit related fees which were up 44.5 percent y-o-y, increased electronic banking fees (+32.1 percent y-o-y) as well as foreign exchange income growth to N16.9 billion in June 2015 from N7.2 billion as at June 2014.
On the other hand, interest expense rose by 47.11 percent to N73.10 billion in the period under review compared with N49.69 billion in June 2014.
The spike in interest expense was mainly due to increase in cost of customer deposits (+42.3%y-o-y) as well as interest payment on the Tier 2 $ 450 million subordinated debt issued resulting in increased interest payments on borrowings (+ 169 % y-o-y).
Exchange rate restrictions weigh on foreign exchange growth
The CBN has restricted the foreign exchange trading on banks, a policy banks say is haemorrhaging profits, causing liquidity squeeze.
The Abuja based bank applied rules and restrictions to stabilise the naira after it declined to a record low in February as the price of oil, the nation’s major foreign-exchange earner fell by a half in the second half of last year. The central bank has devalued the naira twice since November and prevented banks from buying dollars in the interbank market without matching orders, steadying the exchange rate while reducing liquidity.
As a result of the aforementioned curb in foreign currency, FBNH,s foreign exchange income declined by 25.7 percent quarter on quarter (q-o-q). The bank said the drop in FX income was in line with the slowdown in velocity and liquidity of foreign exchange market activities in the country.NIR growth excluding FX income is 23 .1 percent.
Fees & Commission Income reduced by 5.4 percent to N33.2 billion caused by reduction in commission on turnover (COT) by 18.9 percent, money transfer commission by 24.4 percent as well as the y-o-y decline in LC fees 25.6 percent.
The 18.9 percent y-o-y decline in COT to N6.4 billion in the period under review from N7.9 billion last year reflects the decrease in COT charges following the CBN directive. Due to increased turnover and enhanced monitoring of transactions, COT increased in Q2 by 33 % to N3.7bn (Q12014:N2.8bn).
Upturn in profitability despite higher operating expenses.
FBNH well venerated operational efficiency is a tradition that the bank upholds.
The bank has been able to consistently sustain its effective cost management strategies thus profitability. Despite its branch networks across Nigeria, Europe and Africa, the bank through focus strategy and market penetration has been able to sustain profitability.
The bank achieved its strategic cost containment initiatives implemented as cost to income ratio reduced to 61.50 percent in June 2015 compared with 65.50 percent the previous. A lower CIR is the better for a lender.
However, these cost control strategies weakened in the review period as operating expenses increased by 15.20 percent to N119.20 billion as against N103.40 billion last year.
The growth in operating expenses was caused by the bank’s staff costs and the regulatory induced by the CBN such as the AMCON Charge. It will be recalled that regulators mandated all banks in Africa largest oil producer to keep with a sinking fund 5 percent of their total assets. This charge has been bleeding the profit of lenders.
Impairment charge increased by 239 percen to N22.58 billion in HY 2015 compared with N15.92 billion the previous year. The growth in loan loss expenses can be attributed to recoverable debts and aggressive growth in risk assets accretion.
Despite rising operating expenses and spiraling impairment charge on loans, the banks recorded a 7.7 percent increase in profit after tax to N40.1 billion in the period under review compared with N37.20 billion last year. Profit before tax jumped by 7.9 percent growth to N52.10 billion in June 2015 as against N48.30 billion the previous year. Operating income moved by 22.80 percent to N193.90 billion in June 2015 as against N157.80 billion last years.
Pre tax return on average equity reduced to 19.20 percent in June 2015 as against 20.40 percent as at June 2014. Post tax return on average equity fell to 14.80 percent in 2015 as against 15.70 percent as June 2014. Return on average assets reduced to 1.80 percent in the period under review as against 1.90 percent as at June 2014.
Net interest margin rose to 7.8 percent in June 2015 from 7.4 percent as at June 2014.
The bank’s performance in the period under review is better than analyst’s expectation.
Due to the weak macroeconomic indicators caused by the headwinds, we had anticipated a gross earnings of N230 billion and interest income of N190 billion while expecting a drop at the bottom line level.
“The Group is continuing to perform strongly, with gross earnings and operating income respectively up 28.0% and 22.8% year-on-year, despite the challenging macroeconomic environment, but resulted in making conservative provisions on our loan book. These results are indicative of the fact that actions we have implemented to effectively utilise our investments and enhance profitability, while diversifying revenue streams have started to give the desired results”, said Bello Maccido, Group Executive Officer of the Bank.
“Given the current results, we remain confident about the rest of the year. Our focus remains on maintaining profitability and delivering sustainable returns to our shareholders. In order to achieve this, we will continue to work towards building a resilient business and driving efficiencies.”, said Maccid
Contributions from retail pushing high quality deposit base despite weak macroeconomic indicators
The weak macroeconomic indicators stoked by the CBN monetary policies and the Basel 11 requirements are causing liquidity squeeze and slowing bank’s lending.
Despite the aforementioned challenges, FBNH’s customer deposits grew by 2.50 percent to N3.10 trillion as against N2.94 trillion as at December (FY) 2014. The bank’s CASA remains stable at 65.7 percent (FY 2014: 65.6 percent ) of the Groups total deposits providing a healthy funding base as the retail business at the Bank grew 10.9 percent y-o-y contributing 62.8% (FY 2014: 57.3 percent) of the Bank’s total deposits.
Loans and advances increased by 4.30 percent to N2.30 trillion in June 2015 from N2.20 trillion as at the December 2014. The bank has put in place deliberate strategies to reduce exposure to oil and gas sector. The oil and gas book declined 7.30 percent year to date with with downstream and services recording 13.2 percent and 13.4 percent decline respectively.
FBNH’s Non Performing Loans (NPL) ratio closed at 4.1 percent in June 2015 compared with 3.0 percent as at June 2014 with adequate provisions made on the impaired assets. The growth in NPL was driven by the information & communication, oil & gas and Personal & professional sectors.
Cost of risk increased to 2.1 percent in the period under review from 0.7 percent last year; driven by assessment of general provisions on the loan book in view of the challenging operating environment largely driven by reduced government revenues and decline in crude oil prices.
The macro issues have resulted in backlog of salaries to government employees and delays in payment to government contractors thereby resulting in high default rate in the personal & professional category according to the bank’s website
“The Bank will continue to drive the collections of maturing obligations on the portfolio and intensify remedial management in order to keep asset quality within acceptable thresholds in light of adverse economic backdrop,” said the bank in the statement.
A breakdown of the bank’s loan book by sector for the half year 2015 showed Manufacturing got the highest allocation with 32.4 percent; followed by Oil and gas services, (17.1 percent); Real estate activities, (15.30 percent); Agriculture Forestry and Fishery, 14.6 percent; and Oil and gas upstream, (8.20 percent).
Total assets increased by a single digit 1.70 percent to N4.4 trillion in June 2015 from N4.3 trillion the previous year. The slow is as a result of some of the termed out loans to oil & gas services.
BALA AUGIE
