How FBN Holdings Is Making Profit
MICHAEL MOSES.
FBN Holding is riding on the back of loan recovery and write backs to stay the course of rebuilding profit. The strategy worked for it quite well in 2018, when it registered a 31 percent advance in after tax profit to nearly N60 billion. In the past five years, the bank expensed more than N600 billion in loan impairments, which crashed profit for most of the period.
Management is now turning the table to the reverse side of recovering previously expensed loan losses. That amounts to reclaiming spending on bad borrowers to build wealth for shareholders. The outcome is positively impacting the bottom line directly and that impact is quite significant.
Loan impairment expenses dropped for the second year by 43 percent in 2018 after a 33 percent drop in the preceding year. This reflects increasing write backs of previous credit impairment expenses to profit. Cost savings here came close to N140 billion for the past two years.
The bank’s management is moving in the same rewarding direction so far this year. At the end of the first quarter in March 2019, loan impairment expenses again dropped by 45 percent to below N14 billion year-on-year. The development saved more than N11 billion for the bank and that was the singular factor that accounted for profit improvement during the period.
Beyond saving costs on loan loss expenses, FBN Holdings is taking fundamental actions to heal the wounds of credit losses by redressing the balance sheet. The aim is to reduce risk exposure by shifting substantial resources from loans and advances to investments.
Last year, management cut down the size of the credit portfolio by 16 percent to roughly N1.7 trillion – the lowest net lending position the bank has reported since 2013. The effect of that is that loans and advances shrank from over 50 percent of total assets at the end of 2014 to 30 percent at the 2018 closing. Further reduction of the bank’s credit volume is happening in the current year with a slight decline at the end of the first quarter.
A reverse movement is happening in respect of investment securities – which advanced by 33 percent to about N1.7 trillion in 2018. With the move, investment securities have occupied a significantly increased space in the bank’s balance sheet from 16 percent of asset base in 2014 to 30 percent at the end of 2018. The bank’s strategy is moving assets from loss driving loans and advances to low risk-high return government securities.
The drop in loan impairment expenses is providing the strength to defend profit and also gallop over daunting operating challenges. At the centre of the challenges is inability to grow revenue as interest income – the main earning line, closed flat at N112 billion at the end of the first quarter. This is a lingering weakness from last year when a 7.5 percent decline in interest income led to a decline in gross earnings. The bank is showing inability to grow revenue for the third year running.
An unwelcome trend for the bank is that interest expenses keep growing against flat of declining interest income. That was the record in 2018 when cost of funds rose by 9% to N150 billion against a drop of 7.5 percent in interest income.
It is again the position at the end of the first quarter in 2019 with interest expenses growing by close to 8 percent against the flat position of interest income. The result is a sustaining drop in net interest income for the second year. The average interest cost per unit of revenue has continued to increase.
As was the case last year, total operating expenses are again growing as revenue is failing to grow, meaning that management has to devote increasing proportions of gross income to operating cost. In 2018, operating cost margin went up from 40 percent to 45 percent, pushing up further to 48.5 percent at the end of the first quarter – the highest cost margin since 2015.
The drop in loan loss expenses provided the strength for the bank to counter increased incursions of interest and operating expenses on revenue in the first quarter and enabled an improvement in profit. After tax profit amounted to N15.79 billion for the group at the end of the first quarter, an improvement of 7 percent year-on- year.
Profit growth is forecast to slow down to 5 percent at full year, indicating profit in the region of N63 billion for FBN Holdings at the close of 2019. This would be a sharp slowdown from the 31 percent growth in after tax profit the bank recorded in 2018. The bank is therefore expected to remain in the process of rebuilding profit to the all-time high of N84 billion attained in 2014.
Earnings per share amounted to 42 kobo for the bank at the end of the first quarter, just slightly up on 40 kobo per share in the same period last year. The full year expectation is N1.75 per share based on the forecast profit for the year. The bank closed last year with earnings per share of N1.65 and paid a cash dividend of 26 kobo per share.
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