BEATING THE ODDS

HALF YEAR 2020: AGAINST  ALL ODDS

The operating environment for banks in Nigeria ,as with other  economic  agents ,was not quite clement in the first half of 2020 ; banks battled  fiercely  with the current floundering economy  bastardized by covid 19 palaver and its  global  impacts . In the corporate world ,stagnant growth , declining margins and falling  market share  are palpable everywhere .Surprisingly  however, with the   release of the  half  year result for 2020   , the red ink blotting the progress of First  Bank Nigeria  has been dabbing   off leaving only promises of a perpetual stay within the black lines of profitability

The Group Managing Director  Mr Eke  highly impressed lauded the unusual performance atthis unusual time .”The H1 2020 financial results are impressive and reconfirm our consistent focus on enhanced shareholder value. Despite the difficult operating environment, the H1 results demonstrate our resilience and capacity to deliver on long-term ambitions. 

.Although, at the top line level the bank’s performance was modest ,however,FBN Holdings Plc(“FBNH”)excited its stakeholders by hauling up its bottom line superlatively .In its recently announced   unaudited results for the six months ended June 30, 2020the bank’s gross earnings grew moderately by 5.7% to N296bn from N280bn in the previous quarter while profit before tax grew by 14% to N41.4bn; its profit after tax grew phenomenally by 56% to N49.5bn .FBN clearly demonstrated that it is not what you get at top line that matters at times but what you make out of it . Its net assetsequally  grew by 6.5% from N661bn to N704bn.

A detailed analysis and its subtletiesin its performance give a better view of the management value creativity .This financial year, no doubt, is unique. Expectedly , the circumstances surrounding this financial year indicated that the banking core business  of maturity transformation may suffer a serious setback

Inter play of negative forces from covid 19  pandemic and   spillover effects from various   economic agents relying on banks for loansand for which  the bank relied for deposits and sundry services  reinforced by  tough   regulatory  tight  controls and policy   instability  joined forces to wage war against banks margins and profitability.  The above forces affected both the revenue and margins of many banks with untold negative impacts on the top line .But FBN appeared to have managed the   situation with the benefit of certain critical success factors particularly its unrivalled brandimage and strategic capabilities. On year on year  basis ,gross earnings of N296.4 billion, upby 5.8%. The bank’s net-interest income of N131.3 billion came down by 7.4%,Its ability to translate income from its core business of net -interest margin also was moderate but  below the corresponding period performance  slumping to 6.8% from  7.5%in 2019 .But this may not be farfetched. Pressure from the high  cost to income and low yields on assets together waged war against the management drive to translate earning to income .

However ,its non-interest income of N80.1 billion, grew  up impressively by 46.8%. This may not be farfetched. Low returns on investment is believed to be systemic or an economic wide phenomenon. But the bank’s management was still on top of the game .It keyed into to a fact that non interest income is usually a key  to  stabilizing earnings especially at the time  of recession and interest rates volatility. This greatly countered low returns from the core banking business as non interest income soared    . . This helped the bank to rev up operating income of N211.4 billion by  up 7.7% .

Moreover, while impairment charge for credit losses of N30.7 billion jumped to the roof top by  38.6% against N22.1 billion in June 2019 ,the management skillfully  control its  operating expenses of N139.2 billion with a minor increase of  0.9% y-o-y compared to Jun 2019: N137.9 billion. This cost control frustrated the spoilers above in the areas impairments andcounter balanced earnings assets unimpressive returns.

Moreover ,this greatly enhanced the bottom lines .

Profit before tax of N41.4 billion, up 14.3% y-o-y (Jun 2019: N36.2 billion). This may not be seismic but by the standards in the industry in this critical economic environment   , it was  a big jump .

Profit after tax of N49.5 billionrose  up 56.3% y-o-ybasis as it stood N31.6billion in June  2019.The margins position however exposed the ugly past of the bank heavy  provisioning. But it is  a pointer to juicier outlook in the remaining part of the year .Its pretax margin improved slightly from 13 percentat N36.2 billions in June 2019  to 14 percent standing  at N41.4 billions in June 2020 .This means for everyN100 naira made by the bank from a combination of interest assets, fees and commissions before paying  a   tax man  it  makes only N14 compared to N13 in the corresponding period of 2019 . Pretax margins are an indicator pointing to how well a company manages its financial resources. For a bank still battling with heavy provisions  , its pretax margin represents making up for the past mishaps . This informed the situation of First Bank which has embarked on  consistent  efforts cleaning up its books in the last few years. This is evident in its inability to translate its operating income margin of 71. 3 percent as against 69.2 percent  between June 2019 and June 2020 to a better  pretax margin  advantage. Surprisingly however its net profit  margin experienced  a better performance at 17 percent compared to 11 percent  year on year basis . But this may not be farfetched.  The bank divested from its insurance and this surely enhanced its net profit margin.

Commenting on the results, UK Eke, the Group Managing Director of FBNHoldings said: 

“The 56.3% y-o-y growth in profit after tax for the period is a testament to the strength of our organisation to continually deliver exceptional services to our customers in these unprecedented times. We have been able to achieve this feat by leveraging our agent banking network, innovative e-banking capabilities, and operational efficiency utilizing technology. During the quarter, we successfully divested from the underwriting (insurance) businesses to focus on our banking operations. We are confident this will enhance greater value to our stakeholders and strengthen the group’s resolve to consolidate its leadership of the banking sector”

Not only its divestment from the insurance  enhance  the bottom  line . A detailed analysis of the bank’s book showed its post-tax return on average equity 14.5% (Jun 2019: 11.6%) while its post -tax return on average assets 1.5% (Jun 2019: 1.1%) Moreover , its cost control mechanism boosted the bottom line After  inter play of forces of cost and revenue drivers its cost to income ratio showed a marginal improvement with the ratio improving to  65.8% from   70.3%in the corresponding period of 2019 .

The bank  also demonstrated its rare strength in  robust assets management skill .Total assets of N7.1 trillion, up 14.9% year-to-date (y-t-d) (Dec 2019: N6.2 trillion). This further consolidated its leadership  position in terms of size .

The above advantage as well as  the bank brand value and efficient marketing machine played a critical  role in the area of deposit gathering. Customer deposits of N4.4 trillion, up by 8.8% y-t-d (Dec 2019: N4.0 trillion)

In spite of deleterious  environment the bank increased  its net loans and advances to   N2.0 trillion, up 7.7% y-t-d compared to N1.9 trillion in the first half of 2019. The

 bank  was also able to live up to its promise to tame its NPL ratio. This improved further to 8.8% compared  to 9.9 percent in the full year  2019.

The capital base of the bank had been under stress due the negative impacts of toxic loans and low earnings   but the management has demonstrated its ability  to upturn this development. Its 16.5% Basel 2 Capital Adequacy Ratio compared to its  Dec 2019: 15.5% figure confirmed this as much.Following the divestment, FBNHoldings injected Tier 1 capital into FirstBank, effectively increasing its CAR to 16.5%. This provides a comfortable buffer against regulatory requirements with the potential to support any emerging business opportunities.The future outlook is also impressive .Looking ahead, we remain cautious, but we are confident that our business is fundamentally strong to withstand any future challenge towards enhanced performance”.

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FULL YEAR 2019: TAKING THE BULL BY THE HORNS.

In this environment, banks face a skeptical if cynical public. Rightly so; what with the proclivity for the interest mongers to duck festering positions behind spruced upfigures. Not so for First bank; instead , the bank is once again proving to be a role model in corporate governance and taking  tough  decisions to end a dragging battle of toxic loans once and for all .

 The bank went to  work, sleeves rolled-up, digging a trench for bad and delinquent loans and entrenching good governance with full disclosure .

In 2015 financial year, the bank wrote off N127 billions  worth of loans that were fully provisioned  coupled with some NPLs that were recovered. By the end of that year the bank problem loans dropped by 49 percent to N273 billions .Since then , the bank has  sustained its book cleaning effort. As  at the end of 2019 , it equally wrote off  N366.4 billions . By  the end of that year the value of absolute NPLs was N196.9 billions compared to N535.0 billions in the financial year  2018.

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In the last few challenging years , First Bank managers ,no doubt , have borrowed and benefited from the lesson of tenacity taught by Robert H.  Schuller the author  of Tough Times Never Last But Tough People  Do Today, the hope is rising as the failings are being set right . The  bank non performing ratio  has been drastically reduced to single digit in the 2019 financial year.

NPL ratio fell to 9.9 percent  in line with the management guidance  of a single digit ratio by the end of the financial year as against  24.7 percent  in 2018 financial year 

Asides the above, more positive signals on the battle against  the credit risk became more evident with impairment charges coming steeply down by 41.5 percent and the cost of risk rolling down to 3 percent from 4.2 percent between 2018 and 2019

The  strategic move  is expected to serve as a sinecure for a stronger balance sheet in the coming years. This development is already generating  a celebration galore among stakeholders. This may not be misplaced. For almost five years now , this financial elephant has been grappling  with the challenge of high volume of toxic loans. .

A peep into the loan  debacle may shed more light  on theenormity of the  challenge before the  management and  how it was confronted. This crisis crept in after 2015 oil price crash ,though it started in the middle 2014 when the oil price started nose diving . As though this were not enough, the 2016 recession in Nigeria aggravated the situation on ground .Both had very grievous impacts  on the health of banks .First Bank was  worst hit for obvious  reasons ; 47 percent  of its loan book comprised of oil and gas debt .The exposure was to the domestic oil and gas companies that bought oil fields from the oil majors like Shell and others when the price of oil was above $100 per barrel

Thecrisisemanated from the issue above inflicted  heavy misfortunes on the bank  competitive trajectory: stagnant growth,  declining margins and falling  market share. The impacts were devastating: its after tax profits were down by 82 percent and its non performing loans shot up to 18 percent from 3 percent in 2014 ;in the nominal  term  it’s bad loans increased by 445 percent in 2015 .

But the present management of the bank that inherited the crisis is, no doubt, tough in battle with daring steps .

   The management has developed an iron teeth to break the hard nut and the hope of a cornucopia of returns are palpable on the horizon.

No doubt , the clean up exercise and provisioning affected the bottom linein2019  but the beauty of the bank that cannot be beclouded is its  money making savvy and dexterity. The end of bad loan debacle seems to be in sight

.The signals to this effect  are very palpable on the horizon.

In spite of declining economy and deleterious regulatory policies ,First Bank was able to navigate  the terrain and  exploit the opportunities  even in the face of the fierce competition to wring out large and robust earnings  .

The bank registered a 6 percent  jump in gross  earnings. In an absolute term  a total N601.6 billions  garnered in 2019 as against  N567.6 billions in 2018 financial year ..Out of this volume N442.6 billions was from the interest income .But the net interest income was snail pacing ;

net interest income increased marginally by 1.7 percent inching up to N290.2 billions from N285.3 billions  in the previous year. What could have been responsible for the marginal jump in the net interest income ? Surely, the spreads between interest paid on assets and interest received is usually the basic determinant.

Though  this financial Elephant still has  the clout to make big money in the industry as reflected  in its gross earnings  in spite of the fierce competition, the issue of bad loan backlogs, the  toxic loans clean up  and inclement regulatory and macroeconomic environment  combined to wage war on net interest income .The slow pacing  in the net interest income  has nothing to do with its  skill in the core business of lending  or maturity transformation  alone but on the past mishap .

The bank shelled out a total loan of N1.9 trillions  in 2019 , a drop of 6.1 percent  whenthe charge offs were considered. Without these charge offs  it would have been  11percent increase . This is manifested in the net loans and advances during  the period  which moved up by 10.9 percent and made the above huge amount as its interest income . Not  only the past mishap of non performing loans  but deleterious regulatory and macroeconomic environments were a big spoiler to its  financial health. CBN policy come here

 CBN slashed MPR  from 14 percent  to 13.5 percent  .This led to lower assets or earning yields as banks were forced to reprised their assets; it manifested mostly  on the marginal reduction in its interest expenses by 1.4 percent . This  regulatory  policy   negatively  impacted on the cost of funds and yields, this equally affected banks net interest income and ultimately the margin.  In spite of this , First Bank was able to wring out N7.70 from every N100 loan given out as NIM stood at 7.7 percent. This moderate NIM ratio could ,moreover, be linked to a big reduction in its loan loss expense which dropped from N 87.3 billions  in 2018 to N51billions in 2019.  The bank also got a boost to its revenue by a drastic reduction in its impairment charges which cascaded by 42 .5percent. This drove down its cost of risk from 4.2 percent  in 2018 to 3 percent in 2019. Even with a 5.6 percent drop in loan interest income, NIM was boosted by a 15.2 percent  growth  income from investment securities  and a modest drop in the cost of fund by 30bps to 3.1 percent. After the interplay of the above forces the bank cost of income increased from 63.7 percent  to 70 percent in 2019 ..However , the impacts of the 2015 non performing loans backlog were a big threat to its ability  to lend profitably last   financial year. Another spoiler on the bottom  line  was the operating expenses  which skyrocketed  by 18.5 percent. The management linked this pressure to measures aimed at business realignment to improve operational efficiency in the subsequent years .However , with its foreknowledge of the about the above threats , the management of the resorted to the non interest income levers as stabilizing  factors. Its non interest income jumped by 20.5 percent  year on year basis supported by higher fees and commissions. It also recorded 17.8x  increase in  fair value  gains on financial instruments. Non interest  income  is key to stabilizing earnings especially  at the time of recession and interest rates volatility. Interplay of  forces  above put pressure on the bottom line . With the overall cost of income at 70 percent the pre tax margin  grounded at 13.9 percent indicating about N14 was wringed out of every N100 revenue  realised  by the bank at the pretax level .This means that for every hundred  naira the bank earns from a combination of interest assets,fees and commissions, before paying a tax man , it only makes N14. Pre tax margin  is an indicator of how well a company  manages its financial  resources. This further came down to N12.30k at post taxlevel.The danger of this is that a declining net profit  margin  takes a toll on reserves. Slower gross  returns  with  hefty provisioning for the past profligacy coalesce into big drops in profit for the  period. Analysts believe  that by the end of 2020 financial year  the bank should be able to achieve a better NIM after the clean up of the toxic loans .This is expected  to boost its profitability barring any unforeseen contingency . Moreover, the unimpressive pretax margin represents  a commitment to a fresh start towards a more competitive position. Analysts argue that once the provision Peter’s out , every naira earned would contribute towards a gain for the bank .

 and this has affected bottom line.

It is the sinecure for a stronger balance sheet in the coming year management insists.

This year, Gross earnings trudged 38 percent from N27.5 billion to N37.9 billion on the strength of its 180 branches spread across the country. The modest paced growth seems to fit the average rise in fixed assets but raises questions against a steep climb of earning assets.

Fixed assets, which may be associated with number of branches among other assets,was almost steady at42.7 percent from N4.99 billion to N8.5 billion while earning assets tripled to N324 billion from N112.6 billion. If anything, a racy earning assets figure should result in more robust earnings except may be spreads or the difference between interests earned and interests paid are not quite attractive. It could also be because commissions from non interest dependent transactions are dropping.

But these two indicators are on the rise at Finbank. Interest earnings bettered last year’s by 70 percent at N26.17 billion from N14.75 billion despite an equally leggy interest expense figure of N11.9 billion or a 66 percent jump from the former N7.16 billion.

The interplay between interests paid and those received ushered net income of N14.3 billion, an 88 percent growth from N7.6 billion.

But how successful are the investment decisions of Finbank relative to last year’s? The bank looked better last year in returns to investment than this year. Net Interest Margin in the current year is 4.4 percent. It was 6.8 percent last year. In absolute terms, investment income fell from N91.5 million to N15.63 million.

This has implications for Gross returns in the coming year especially as the bank has pumped more money into investment, putting in as much as N8.7 billion compared to the N3 billion of the year before.

Analysts say the low return on investment is systemic or an economy wide phenomenon and is as a result of the general lull occasioned by the worldwide recession and is not likely  to have an adverse affect on the bank going forward as the recession is expected to taper off by the bank’s next financial year.

Since only a scanty trace for much of the lethargy can be put at the door step of the bank’s earning assets, the next natural candidate is what the bank makes from commission.

Are commissions getting clobbered? Yes! Commissions and other incomes backtracked 9.8 percent from N13.1 billion to N11.82 billion. Much of the drop here is traced to reduced takes from the forex market and investment income.

Analysts from Financial Market Intelligence, reveal that it may be worth the while of the bank to rev up this item of its balance sheet, stressing that it holds the key to stabilizing earnings especially at a time that the world is in recession and interest rates volatility is a factor in Nigeria.

The bank’s slower moving gross returns with hefty provisioning for past profligacy coalesce into big drops in profits in the period.

Pre tax profits fell 52 percent from N3.33 billion to N1.6 billion. This uninspiring run suppressed pre-tax margin significantly to 0.04 kobo per naira where it once did 0.12 kobo.

This means that for every naira the bank earns from a combination of interest assets, fees and commissions, before paying the tax man, he makes only three kobo.

Pre-tax margins are an indicator pointing to how well a company manages its financial resources.

For Finbank, it becomes clear that this position only represents making up for past mishaps; bad loans make up 23 percent of the bank’s portfolio. The position, though, seems poised to improve since the bank gave out only 18 kobo of every naira of deposit as loans this time around. Last year it gave out 22 kobo.

Even so, the bank grew its loan portfolio by 112 percent from N28.47 billion to N60.33 billion.This is congruent with a faster growing deposit base at 114 percent to N320 billion from N130 billion.

The decline in pre-tax margin represents a commitment to a fresh start towards a more competitive position. Analysts ague that once the provisions peter out, every naira earned would contribute towards gain for the bank.

But net profit margin was also down to 0.03 kobo where it had made 10 kobo previously; this represents negative real earnings in an economy high on inflation such as ours.

This took a toll on reserves even as the bank went to the market to shore up its shareholder funds in an offer that was said to have raked in ‘over N100 billion.

If indeed that much was raised them the bank would have positioned itself, at last, for big ticket transactions.

Alluding to this positioning, OkeyNwosu, the bank’s CEO says, ‘in order to achieve superior results in the coming year, the bank is beign re-engineered towards achieving its strategic goals’.   According tro him, ‘Over the past months, appropriate initiatives and projects required to refocus and transform our position have been implemented and others in various stages of completion’.

Among the initiatives, the MD says is to put in place a ‘robust service management framework and that of enhanced risk management.