Nigeria Banking Sector Coverage - December 2011 'Bad ... - Imara

The 9M results to 30 September 2011 have continued in
the same vein as FY 10 in terms of improved earnings.
Interest income was up 10.33% to NGN 150.4bn, while
interest expense dropped by 32.63% to NGN 31.5bn,
resulting in net interest income of NGN 118.9bn, an
increase of 32.73%. The improvement came as higher
interest rates filtered through on the asset side while the
yield on deposits was kept relatively flat, offsetting the
strong deposit growth. This scenario saw the cost of funds
fall to 2.1% from 4.5% y-o-y, and slightly increase
compared with H1’s 1.8%. The average yield on interest
earning assets improved to 10.1% from 9.8% in the
comparative period and 9.4% at H1 11. Consequently,
margins went up to 8.1% (9M 10: 6.4% and H1 11: 7.8%).
Included in interest income was a reclassification of NGN
10.2bn from non-interest income, relating to the writing
back of suspended interest following AMCON sales.
Net fees and other income saw an even better
performance, up 49.14% to NGN 60.8bn, as the
contribution of non-interest to interest income shifted to
33.83% from 31.27% at September 2010. This was driven
by increased commission on turnover due to higher
deposit volumes, increased transaction volumes and
credit related fees, among other factors. Operating
income thus increased by 37.86% to NGN 179.7bn.
Operating expenses were up 27.63% to NGN 107.1bn and
the cost to income ratio improved to 59.62% from 64.39%.
The provisioning charge was 4x higher y-o-y at NGN
23.5bn, (NGN 14.4bn at the half year). There was a
notable increase in provisions for other assets, up to NGN
4.9bn from NGN 600m at the half year, as the declining
equity market led to large mark downs. PBT closed the
period at NGN 49.0bn, an increase of NGN 20.43%, while
attributable earnings were up 31.79% to NGN 42.9bn.
The balance sheet shrank by 1.78% from the H1 position
to NGN 2.9tn, with net loans and advances up 11.25% to
NGN 1.3tn, while treasury bill holdings were up 5.7x to
NGN 135.3bn and investments gained 44.87% to NGN
510.8bn. On the liabilities side, deposits went up by
38.63% to NGN 2.0tn, continuing to show strong growth.
The reported NPL ratio improved to 4.74% from 5.82% y-oy,
but reflected a deterioration from the 3.8% as at the
H1 11.
FBN Q3 11 Results Summary (m) 30-Sep-11 30-Sep-10
Net interest income 118 905 89 584
Net fees and other income 60 779 40 753
Operating income 179 684 130 337
Non-interest expense (107 123) (83 930)
Allowance for credit impairment (23 544) (5 704)
Operating profit 49 017 40 703
Attributable earnings 42 915 32 562
Outlook
The focus for FBN going forward will remain on
lowering the cost of funds to boost net interest
margins, increasing the contribution of non-interest
income by pushing fees and commissions, getting the
cost to income ratio to stay below 60% and measured
loan and advances growth.
Based on the current performance and the conference
call results update, we forecast earnings per share of
153 kobo per share, an increase of 49.8% on FY 10,
based on the assumption of improved net interest
margins due to the increase in interest rates in Q4,
lower cost of funds, cost to income ratio trending
towards 60% and a provision to loan ratio of 5.1%. We
forecast RoAE and RoAA ratios of 15.6% and 2.1%
respectively for the full year.
In the 9M results presentation, FBN indicated that
negotiations were continuing for AMCON to buy the
Sea Wolf loan, which was circa NGN 99bn, and that a
haircut of approximately 10% was expected,
(newspaper reports suggest this was concluded with
AMCON buying the loan at between 85% to 95% of face
value). While as indicated by FBN, the loan was
performing, it was considered too large by AMCON and
thus “systemically important”, while it also exceeded
FBN’s single obligor limits.
The group also announced the acquisition of 75% of
Banque International de Credit, a bank in the DRC in
line with its SSA expansion strategy. While the growth
prospects in that market cannot be argued against,
anecdotal evidence suggests that that is one of the
more difficult markets to invest in, both from an
infrastructure deficit and political risk perspective,
and thus makes an interesting choice as a first foray
into SSA. We are not sure it is the right one, but
according to the numbers presented by FBN, it is
buying into a profitable business, with a net income of
USD 5m at FY Dec 2010, and total assets of USD 198m,
net loans of USD 83m and deposits of USD 163m.
Equity was at USD 21m, and management indicates it
paid 2x book for the bank.
Valuation and Recommendation
Using a DCF valuation, we arrive at a target price for
FBN of NGN 13.43, representing 49.0% upside on its
current share price of NGN 9.01. As one of Nigeria’s
traditional ‘top tier’ banks, we expect FBN to remain
a major player in the sector. BUY.
30-Sep-11 30-Jun-11
Loans and advances to customers 1 272 224 1 226 020
Deposits from customers 2 010 946 1 919 717
Total equity 321 817 321 044
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