• First Bank Plc (FBN) reported 30% YoY growth in turnover to N182.3bn for the 6 months to June 2012. PBT and PAT jumped 50% and 45% YoY to N53.5 billion and N45.4 billion respectively despite a 2.7ppt increase in the tax rate to 15.2% relative to the base period.
Lower yields slow revenues
• Loans grew a further by 10% in Q2 bringing YTD growth to 17% to reach N1.5 trillion. However, a 260bps decline in loan yields QoQ to 12.4% indicates some pricing weakness which suggests that risk asset expansion was largely targeted at the corporate segment. This is emerging as a trend amongst lenders who have released results thus far and lends some credence to intensifying completion in this space reflecting stronger balance sheets across the industry--as we anticipated. Investment book was flat QoQ at ~N720bn further contributing to overall weaker asset yields.
• Consequently, weaker interest income (12% decline QoQ) underpinned the 2% QoQ contraction in quarterly revenues to N90bn for Q2 2012, though this was to some extent offset by a jump in non-interest income (+32% QoQ). Consistent growth across line items in the latter category (excluding the significant boost from forex income in Q4 2011) reflects improved, and better priced, services offerings.
Management has recently harped on its many initiatives on this front--including self-service branches, increased migration to e-platforms and deployment of offsite channels like POS terminals and online-banking--which appear to be bearing fruit. Overall, the weaker YoY topline growth reflects moderation in gross earnings from Q1 2012, but it also bears the imprints of a significantly stronger performance in Q2 –compared to Q1– 2011.
Industry pressures on funding costs
• While FBN cut back sharply on interbank takings (-38% QoQ) where rates have remained persistently elevated deposits grew N140bn in Q2 to N2.2 trillion in the quarter. Nevertheless, despite its heft, the bank was not immune from funding pressures that have emerged across the industry; an uptick in deposit rates reflecting tighter--liquidity conditions in the economy--coupled with increased volumes culminated in a 28% QoQ (+54%YoY) rise in interest expense.
Consequently, WACF deteriorated 30bps QoQ to 2.4% and net interest margins shrank 120bps to 8.3% again validating our expectations for an uptick in funding costs across industry--even the larger, more liquid banks—in light of rising competition and tight monetary policy.
Opex and provisioning improve moderately
• FBN sustained investment in footprint expansion. The number of business locations opened in 2012 rose to 47 (Q1: 21) and though opex remained elevated as a result (+26% YoY for H1), there was a mild (-2%) improvement to N44.2 bn in Q2 2012. However, deceleration in operating profit due to higher funding costs resulted in a 160bps deterioration in cost-to-income ratio to 58%.
•FBN booked charges of N3.7 bn in the quarter, 32% lower than the Q1 charge which magnitude FBN had attributed to proactive treatment of some impaired loans and indicating that the potential for some write backs we had anticipated may be materializing. However, we note the mild deterioration in NPLs to 3.3% from 2.7% which could at least limit the extent of such gains.
• Overall, higher funding costs and slower revenue were the primary drivers of the ~200bps QoQ contraction in PBT and PAT margins to 29% and 25% respectively. Nonetheless, these remain well above FY 2011 margins of 17% and 15%, respectively.
Softer Q2 could set the tone for the rest of the year
• Although FBN retains ample room for risk asset expansion--CAR stands at 26%--increased saturation of the corporate space and falling asset yields indicate revenues will likely slow going forward. Furthermore any attempt by FBN to maintain margins by going down the credit ladder will likely have muted impact on FBN due to the size of its balance sheet. In addition, the 400bps increment in CRR will likely have the a significant impact in slowing risk asset growth in favour of investment in securities across the industry which could drive yields lower as competition intensifies. Thus, also factoring in the stronger rate of growth in H2 2011 on the back of a sharp jump in market interest rates during the period, we expect revenue growth in H2 2012 to decelerate across the industry.
• Nevertheless, FBN reportedly plans to raise ~$500mn Eurobonds to take advantage of falling yields to replace its prior $175 mn 9.75% issue. This should provide some support for asset creation going forward while adding some stability to its funding base at moderate cost.
• FBN has raised ~N260 billion in deposits so far in 2012 with relatively moderate impact on costs which reinforces our view of its ability to capture deposits cheaper than peers, regardless of intensity of competition. However, in line with our expectation that banking system liquidity will likely remain tight, we expect higher rates will lead to an estimated 100bps dip in the ratio of net interest to interest income to 78%.
• H1 results also indicate better cost control as efficiency initiatives, including the centralization of back office functions, appear to gain further traction. We still expect further moderation in costs as FBN’s investment in infrastructure decelerates into H2 20112. Nevertheless, on the back of slower revenue growth, we estimate cost to income ratio will rise a further 1ppt to 59% by FY2012.
But competitive advantages should provide some support
• Though our revisions have resulted in mild dents to forecast profitability in line with Q2 2012 results, we expect the broad improvements over 2011 levels to persist and expect performance to remain robust in the context of the deteriorating environment. Whilst MPC’s decision to tighten policy further have heightened the stakes and will probably have a significant adverse impact on industry NIMs, we believe this is likely to accentuate the dichotomy between the larger and smaller banks with regard to funding cost and FBN’s industry leadership on this front could improve its position relative to peers. We expect its maintenance of relatively low funding costs to be complemented by its ability to leverage its scale to maintain some buffer for its margins in the investment securities space should demand intensify as we expect, underpinning much better performance than most peers in a likely challenging H2.
Aside mildly lower profit estimates in the current year, we have reflected higher funding cost expectations farther out into the medium term as it appears the monetary authorities will remain in tightening mode for longer. The expected contraction in NIMs coupled with mild deterioration in CIR culminated in a downward revision of our fair value estimate to N17.4 from N17.9, previously. Nevertheless, the upside potential of 47% implied relative to current price remains significant. Furthermore, the stock trades at attractive multiples of 6.6x current PE and P/Bv of 1x when compared to industry averages of 9x and 1x, respectively. Based on the foregoing, we retain a BUY rating on the stock.
ARM ratings and recommendations ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
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