FBN Holdings Plc faces a volatile shift in earnings performance from growing profit to a new high in 2020 to drops in revenue and profit in the first quarter of 2021. It closed first quarter operations with gross earnings down by 14.4 percent to N136.6 billion.
The bank is losing revenue for the second year after it closed 2020 operations with the lowest gross income in five years. Since it recorded a decline in 2018, revenue has remained below the 2017 peak.
Last year the bank was able to build profit from a decline in gross earnings. This year, profit is dropping far ahead of revenue.
Profit dropped close to three times ahead of revenue at 39 percent to close at N15.6 billion for the first quarter. Strong recovery processes over the past five years to 2020 have given way suddenly for a major profit drop in the first quarter.
The bank’s cost cutting strategy that enabled it to grow profit from a decline in revenue in 2020 isn’t working this year. Last year, it converted an increased proportion of the earnings into profit, raising net profit margin to the highest mark in six years. This year, profit margin has dropped from 15.5 percent at the end of last year to 11.4 percent at the end of the first quarter.
Loss of revenue and loss of profit margin made a bad combination that led to the profit plunge the bank registered in the first quarter. It is a reversal of the cost saving functions that lifted profit against a decline in gross earnings last year.
The weakness in revenue performance continues to come from interest earnings, which have been going down since 2018. The rate of drop has accelerated from 11 percent at the end of last year to 25 percent year-on-year in the first quarter. The bank hasn’t seen this level of drop in interest income in more than a decade.
Non-interest income improved by 6 percent to N58 billion over the review period, which moderated the drop in interest income. Net gains on the sale of investment securities is providing the lead for non-interest income for the second year with a 32 percent advance to close to N18 billion at the end of the first quarter.
The drop in interest income is against a continuing build-up of the principal earning assets – indicating a continuing decline in the average asset yield. Customer credit volume rose by over N82 billion to N2.3 trillion over the three months of the first quarter. Investment securities expanded by N236 billion to close the period at almost N1.8 trillion.
There was an accelerated cut in interest expenses to compensate for the drop in interest income. Cost of funds fell by about 43 percent to N25.6 billion in the first quarter, accelerating from a drop of 12.6 percent at the end of last year.
The bank had lowered interest expenses to the lowest figure in four years at the end of 2020 and an accelerated drop this year could push cost of funds down to the region of N100 billion recorded in 2016.
While cost of funds keeps going down, customer deposits keep rising. The bank raked in close to N200 billion in new customer deposits in the first quarter, topping up the deposit base to over N5 trillion at the end of the period. Last year, FBN Holdings saw the strongest growth in customer deposits since 2014.
The move is to match the decline in asset yield with a drop in average cost of funds. The drop in interest expenses against a strong growth in customer deposits is brining about a significant reduction in the bank’s average cost of funds. Despite the big cost saving from interest expenses, net interest income still dropped by over 12 percent to about N53 billion over the period.
Credit loss expenses are on the offensive this year after a marginal decline at the end of last year. Loan impairment charges have changed course from a four- year declining trend and took a forward jump of 35.6 percent to N13 billion in the first quarter.
The bank’s management held operating cost under a tight control during the quarter but this could square up the impacts of revenue drop and the growth in loan loss expenses during the period. The two developments accounted for the bank’s loss of profit capacity in the first quarter.
FBN Holdings closed the first quarter operations with an after-tax profit of N15.6 billion. This represents a drop of 39 percent – indicating the worst earnings season for the bank in recent years.
The bank earned 43 kobo per share at the end of the first quarter, down from 69 per share in the same period in 2020.
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