FBN Holdings, Nigeria’s second largest bank by assets expects its current elevated non-performing loan (NPL) ratio to normalize below 5 percent next year, helping to boost net income and drive its share price.
“At the pre provision operating profits level no bank beats us, at that level we are above 30 percent return on equity RoE, by the time we normalize net of provisions on RoE we will be above 20 percent. Because the NPLs would have been taken out,” U.K Eke, the Group Managing Director told BusinessDay in Lagos.
Return on equity, a measure of a corporation’s profitability reveals how much profit a company generates with the money shareholders have invested.
Impairment charges for FBNH declined by 14.9 percent year on year to N97.6 billion, as at the nine months period of 2017, while the reported NPL ratios improved to 20.1 percent in Q3’17 from 22.8 percent and 26.0 percent in Q2’17 and Q1’17 respectively, as the bank wrote off previously provisioned NPLs.
“We will see a normalisation of NPLs by 2019 and it will be sub 5 percent, we are very confident about that,” Eke said.
FBNH has a 3 year strategic plan (2017 – 2019) that has been very successful in terms of execution, even though the market has yet to fully appreciate the gains being made, despite the recent rally in the stock price, according to Eke.
“2019 is the magic year for us. Last year we were trading at N3.94 at around May, or 0.3X price to book. As of today our view is that the bank is significantly undervalued, and this would be seen by the time we close our books for 2018 and the market sees the results. In terms of market leaders we do not think we would be too far behind and in 2019 we will take our place as number one,” Eke said.
FBNH share price was up 0.78 percent and closed at a 52 week high of N11.66 per share yesterday. The stock has gained 32.5 percent in 2018 already, beating the broad market index which is up 12.75 percent.
Despite the rally the stock still trades at around 0.6 times book value per share, according to BusinessDay calculations. The price-to-book (P/B) ratio compares a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share. For financials a P/B ratio below 1 often means that the stock is undervalued.
FBN Holdings reported last year that 9 months 2017 revenues rose by 5.2 percent y-o-y to N439.2 billion, largely driven by interest income.
Interest income and non-interest income contributed 81.3 percent and 18.7 percent of revenues respectively for the period.
As yields of fixed income securities slide Eke said he expects non-interest income and measured loan growth to drive earnings.
“We are the first bank to achieve 10 million cards issued in Nigeria. You can imagine the transactions processed through those cards. We are migrating customers to digital platforms,” Eke said.
“What would help FBNH to make money would be the customer base and the demographic of the customer , the holding will look at the non interest income opportunities that they have and they are embedded in the customer base, so the holding intend to monetize its asset, via the use of transaction banking, cards, e-business. These are the areas that the company can make money from, with the right strategy.”
Eke expects FBNH Cost of Risk (CoR) to be around 2 percent in 2019 and cost to income ratio to be sub 50 percent driven by automation, digitization, centralization and shared services, not just at the commercial bank level but at the group level.
“The year 2016 and 2017 were years of clean up to repair the balance sheet and 2018 will be the point of inflection…we think that we will be one of the best performing stock in 2018,” Eke said.
PATRICK ATUANYA & ENDURANCE OKAFOR
