FBN Holdings: Still Cutting Loan Losses To Build Profit
FBN Holdings Plc is cutting credit losses for the fourth straight year and that is again providing the strength for profit improvement in 2020. Management has sustained major drops in loan impairment expenses since 2017, which has provided a big cost saving centre for profit recovery.
A drop of 30 percent in loan loss charges in the first quarter to N9.7 billion reflects further progress in recovering bad loans. This enabled the company to keep profit growing amidst volatile behaviour in earnings during the quarter.
The challenge in interest income facing the bank is still in place in the current year. From a flat position at the end of last year, interest income went down by 4 percent to N105 billion at the close of the first quarter in March 2020. The bank is yet to rebuild interest income after a drop of 7.5 percent in 2018 and the strength to do so was missing as at the end of the first quarter.
Capacity building of earning assets that began last year is being sustained and raises expectations of a likely gain of momentum in interest income in the course of the year. Customer lending was up by N200 billion to more than N2 trillion over the first three months of the year. Lending to other banks also grew by over N131 billion from the 2019 closing figure but investment securities dropped by over N253 billion to about N1.2 trillion during the period.
The main challenge for the bank in the first quarter is a volatile behavior of the cost of funds. Breaking loose from a moderated mood at the end of 2019, interest expenses rose by 18 percent year-on-year to N44.7 billion at the end of the first quarter. This is against the 4 percent decline in interest earnings over the same period.
This is a major development in the bank’s cost-income structure this year – which appears to reflect increased dependence on inter-bank borrowings. Due to other banks grew by 38 percent to about N1.2 trillion over the three months period – more than five and a half times the 6.7 percent increase in customer deposits.
The interest cost of generating the naira of interest income rose from 34.6 kobo to 42.6 kobo over the review period. This eroded net interest income, which dropped by 16 percent to a little over N60 billion at the end of March.
Three favorable developments enabled the bank’s management to turn the drop in net interest income into a big leap in operating profit. The biggest of them is the drop in net loan impairment expenses from which the bank saved over N4 billion that strengthened net interest income after loan impairment charges at N50.5 billion.
The second is an exceptional growth of 83 percent in non-interest income to N54.8 billion at the end of the first quarter. This more than compensated for the drop in interest income and accounted exclusively for the growth in gross earnings the bank recorded in the first quarter. This has been the earnings pattern for the bank since 2018 – dependence on non-interest income for revenue improvement as interest income has since then remained weak.
The third leg of the bank’s steps to build profit in the first quarter is a moderated increase in operating expenses. Operating cost per naira of revenue declined from 47.6 kobo in the same period in 2019 to 44.8 kobo in the first quarter of 2020. This enabled FBN Holdings to raise net profit margin from 10.9 percent to 15.4 percent over the review period. This is the highest net profit margin for the bank in six years.
FBN Holdings closed the first quarter operations in March 2020 with gross earnings of N159.68 billion. This is an increase of 14.5 percent year-on-year and the strongest revenue improvement since 2017.
Non-interest income is exclusively the revenue growth driver for the year – which is led by net gains on the sale of investment securities and net gains from financial instruments. The income lines jumped eight and half times to N13.5 billion and from a marginal loss to N8.34 billion respectively over the review period.
Management’s ability to navigate the bank through the volatile picture in earnings and raise profit capacity is the summary of the operating story of FBN Holdings in the first quarter. The bank maintained profit improvement for the third straight year in 2019 and has set the pace for another profit improvement in 2020.
After-tax profit amounted to N25.7 billion for FBN Holdings at the end of the first quarter operations, which is a towering growth of roughly 63 percent year-on-year. The strength for the profit growth came from revenue improvement as well as gain in profit margin.
The outlook for the second quarter isn’t as impressive as the first. The revenue boost seen in the first quarter is likely to slow down in the second and that is expected to break the speed in profit growth. The build-up of credit volume might, however, prop up interest income but that will also come with the challenge of rising credit loss expenses.
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