FBNHoldings (FBNH), the parent company of Nigeria’s pioneer Bank, First Bank of Nigeria
Limited published stellar results, confounding analysts, and exciting investors. Equally as
amazing as the spectacular results, which saw earnings per share surge by 234% to N5.19 was
the fact that the banking behemoth was able to eke out this profit in a financially hostile policy
environment where bank earnings have been squeezed. The Bank’s holding company has also
been a subject of shareholder squabbles, which ordinarily should be a distraction to the
management and a drag on profitability. But in spite of these challenges, the outstanding results
are a testimony to the depth of its management and its capacity to execute a robust strategy.
What is Unique About FirstBank? (Late Entrant to African Markets) As a late entrant into the
scramble for market share in the Sub-Saharan African continent, it was able to play catch up
with its peers in this respect. In the last few years, FirstBank has been able to expand its
international footprints not only across Africa but also in Europe and Asia with branches in the
major markets of the United Kingdom, China, and Ghana. The core element of the bank’s
strategy has been to leverage its huge investment in its Internet banking platforms with a fast
transition into the digital space. Whilst its reputation as an old staid and orthodox bank is being
replaced as a nimble modernised institution with a readiness to compete aggressively with its
younger peers, FirstBank has not lost its legacy as a strong and sound institution. Most of the
performance ratios especially its cost-to-income ratio of 46.8% coming down from a high of 70%
four years ago reveals that its cost reduction and resource optimization strategy is paying off.
Leveraging Economies of Scale is a Core Strategy FirstBank with 595 branches has 13% of all
branches of banks and 13% of all Automated Teller Machines (ATMs) in Nigeria. The bank has
consistently leveraged economies of scale, years of existence, and reputation, resulting in
aggressive customer acquisition.
With a customer base of over 42 million, FirstBank processes 12% of the Nigerian banking
industry’s payment volume. The bank’s current deposit portfolio of N9 trillion is one of the best in
the Nigerian banking industry. The group is also reaping the benefits of crossentities
collaboration as well as increased earnings contribution from international subsidiaries (30.0%
in FY’22 compared to 25.5% in FY’21). Every Dog Has its Day in the SunTranslation Gains
Have Helped but Transaction Losses Could Hinder Growth Banks with long dollar positions will
have initial translation gains, however, if subsequently, they begin to have non-performing dollar
assets, the translation gains may end up as transaction losses down the road. Nigeria’s oldest
bank, FirstBank recorded a revaluation loss of N98bn due to huge naira devaluation stoked by
the Foreign Exchange policy changes. However, the impact on the bank’s profitability was
cushioned by over a 1,000% surge in fair value gains. FBNH’s exposure to foreign currency risk
was mitigated by a decline in foreign currency (FCY) loans from 51.2% in FY’22 to 50.4% in
Q1’23.
Strategy Consistency is Impacting Share Price Appreciation The share price of FBNHoldings
has increased by an average of 131% per annum in two years to N18.65, returning enormous
value to shareholders. The valuation remains attractive with a price-earnings multiple of 2.55x
and an estimated fair value of N19.25. Earnings per share (EPS) at N5.19 Vs N1.55 in H1’22.
Are There Inherent Weaknesses? FirstBank is poised to keep creating value for shareholders
with a reorganised balance sheet position and a refocused management team. Though the
impact of FX unification remains a major concern to Nigerian banks’ profitability and liquidity,
FBNHolding’s long position in dollardenominated assets gives it an edge. We also anticipate an
increase in trading activities by the bank in the event of a drop in the backlog of FX requests
and an influx of new foreign transactions. This could potentially drive-up trading volumes,
increase commissions earned on trades, as well as gains from FX sales. We expect the bank to
deliver an impressive full-year 2023 result. A rising interest rate environment will boost net
interest margin, and solid e-banking operations will support strong non-interest income growth.
We also believe that the bank will be able to maintain a sound asset quality position within the
regulatory threshold thanks to its effective operational and risk management system. FBN
Holdings Plc (FBNH) remains a top player in the industry with a Strong franchise, reliable
funding structure and brand recognition, robust customer base, unique ebusiness and agency
capabilities, contributions from overseas subsidiaries, and a newly reorganised management
team.
What Does the Future Hold Out for FBNHoldings? In an industry where competitive pressures
and the intensity of rivalry increases, a consolidation is almost imminent. We expect that the
field will narrow after a possible increase in the minimum capital requirements in the industry as
impairment of profitability resulting from non-performing loans begins to hurt industry players.
We also expect big and solid institutions like FBNHoldings to be in a position to gobble the
smaller and less viable rivals. The name of the game in the next few years will be ‘’the survival
of the fittest’’.
Culled from Financial Derivatives Company
