FBN Holdings Loses Half Year Profit On Failure To Contain Cost.
MICHAEL MOSES.
A hike in operating cost upset the growth functions of FBN Holding in the second quarter of 2019. The company ended half year operations with total operating cost consuming one-half of gross earnings. This is the highest cost margin for the bank any time since 2013.
The effect of the cost upsurge is the weakening of the ability to convert revenue into profit. Profit margin slipped from 11.4 percent in the same period last year to 10.8 percent at the end of half year operations in June 2019.
Against an increase of 7 percent in the first quarter, after tax profit went down by 5.4 percent to N31.72 billion at half year. The bank began the current financial year raising hopes to maintain its profit rebuilding course for the third year running. The cost and income relationship needed to make that happen faltered in the second quarter.
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Good news however continues to come from loan impairment expenses – which have provided the force for profit recovery in the past two years. Loan impairment charges dropped by 58 percent at half year, accelerating from 45 percent drop in the first quarter. The cost saving boosted interest income net of loan impairment expenses by as much as over N30 billion.
Rising operating cost however prevented the cost saving from flowing down into the bottom line. Having overcome the challenge of massive loan losses that sent profit crashing for two years, the bank has been contending with rising operating cost since 2017.
FBN Holding is currently facing a year in which its inability to raise gross earnings is likely to last for the third year. The ability to improve profit then depends on how much costs it can save. The upsurge in operating cost at the end of half year has undermined cost saving prospects significantly.
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Can management push revenue up or put a seal on operating cost in the second half of the year is the question mark on FBN Holdings’ profit outlook for 2019.
The company closed half year trading with gross earnings flat at N294.22 billion. The problem remains interest income – the main revenue line, which declined by 1.6 percent to about N222 billion at the end of June. Non-interest income leveled up the decline with an increase of 6.6 percent but could not drive an increase in gross earnings.
FBN Holding is expected to close the 2019 financial year with gross earnings in the region of N590 billion. That will keep revenue flat against the closing figure of over N583 billion in 2018.
There was a change in the structure of earning assets at the end of June 2019, reversing a shift of substantial resources from loans and advances to investments that happened last year. Management is again rebuilding the customer loan portfolio after it dropped by 16 percent last year to the lowest mark in six years.
At over N1,743 billion at half year, customer credit portfolio was up by over N59 billion from the 2018 closing. At the same time, the investment portfolio has dropped by 18 percent to N1,358 billion over the same period. It had expanded by one-third to close virtually at par with loans and advances to customers in 2018.
At over N75 billion, interest expenses are flat, showing a sticky behaviour against the decline in interest income. That pressed net interest income down by 2 percent during the review period – the same development that led to a drop of 14 percent in net interest income in 2018.
The high point of the company’s operating story at the end of June 2019 is a drop of 58 percent in loan impairment expenses to N22 billion. This indicates the bank is making a sustaining gain in credit quality with the drop in loan impairment charges accelerating from 45 percent in the first quarter.
Dropping loan loss expenses has been the bank’s profit rebuilding strategy since 2017. With increasing write backs of previous charges, loan impairment expenses dropped by 33 percent in 2017 and further by 42 percent in 2018.
The bank saved close to N31 billion from the drop in loan impairment expenses and yet it was not sufficient to counter the upsurge in operating cost. Total operating expenses grew by 24 percent to over N148 billion at half year. This consumed slightly over one-half of gross earnings, sustaining a trend of rising operating cost margin for the third year running. At 50.4 percent at the end of June 2019, operating cost margin is at a six-year peak for FBN Holdings.
The bank closed half year operations with an after tax profit of N31.72 billion, a year-on-year decline of 5.4 percent. Profit growth forecast for 2019 is revised from 5 percent to flat for FBN Holdings at full year, a mark down of after tax profit from N63 billion to N59 billion.
The momentum needed to keep profit growing for the third year on has weakened for FBN Holdings. Management needs to recharge revenue growth functions and/or squeeze operating cost to regain the momentum in the second half.
The bank earned 84 kobo per share at the end of half year operations, down from 91 kobo per share in the same period last year. The full year expectation is revised down from N1.75 per share to N1.64 based on the revised profit forecast for the year. The bank earned N1.65 per share in 2018 and paid a cash dividend of 26 kobo per share.
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