FIRST BANK OF NIGERIA HOLDCO. (FBNH)

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1 NSE: FBNH l Bloomberg: FBNH NL EQUITY FIRST BANK OF NIGERIA HOLDCO. (FBNH) FX Volatility saves Giant from another fall First Bank of Nigeria Holdco. ( FBNH ) released FY2014 numbers recently, which showed Gross Earnings, Profits-Before-Taxes (PBT), and Profits-After-Taxes (PAT) growths of 21.30%, 1.69% and 17.28% respectively. This earnings performance represented the Holdco s first comparative PAT growth since H1:2013, and was majorly due to the substantial growth in Foreign Exchange income % YoY, which boosted Non-interest income. Although we are encouraged by the Holdco s return to comparative growth, we are sceptical that this level of Earnings growth can be maintained in Our valuation methodology puts FBNH at a target price of NGN9.96 (a premium of 4.73% to the current market price), thus we recommend a HOLD. Top line growth supported by Non-Interest Income growth: FBNH s gross earnings of NGN480.60bn was supported by interest and non-interest income growths of 12.05% and 66.12% YoY respectively. Interest income grew to NGN362.58bn from NGN323.62bn, while interest expenses growth outpaced interest income growth despite the marginal 4.16% YoY growth in deposits from customers. This growth in interest expenses was primarily due to the significant % YoY growth in borrowings. The substantial non-interest income growth was the major reason behind the improved earnings performance, and was driven by the 65.09%% YoY growth in insurance premium revenue, % YoY growth in Net FX income, and % YoY growth in other operating income. We note here that we expect that Q1:2015 FX income may be impressive, as the volatility of the currency which allowed for the growth in 2014 was still prevalent. However, we expect FY2015 FX income will drop significantly, barring any unforeseen economic and financial markets flux. Gross Loans-to-Deposits pegged at 72.8% which still allows for a significant amount of growth; however, the bank s CAR of 16.7% (under Basel II) may prove an impediment. Earnings performance magnifies by lower effective tax rate: FBNH s earnings before taxes grew by 1.69% YoY to NGN92.88bn from NGN91.34bn, as the effects of the 27.46% YoY growth in operating expenses (FY2014: NGN235.80bn, FY2013: NGN185.30bn) acted to depress the trickle-down from the top- to the bottom-line. Profit-After-Tax also advanced, more significantly, by 17.28% YoY to NGN82.84bn from NGN70.63bn as the effective tax rate declined to 10.81% from 22.67% (FY2014: NGN10.05bn; FY2013: NGN20.71bn). Although we expected a growth in earnings for FY2014, the effects of FX volatility resulted in a more marked increase than expected. Given that we do not expect this level of volatility in the FX market in 2015, we are expecting a YoY decline in NII, which might possibly result in a comparative earnings decline by FY2015, barring any unforeseen market conditions which might allow the Holdco to boost income generation. We need to see more; HOLD : The Holdco declared a dividend of N0.10 per share, and a bonus issue of 1 share for every 10 shares owned, implying a total distribution of NGN1.05 per share and a dividend yield of 11.40% on the declaration date. Although, we acknowledge the Holdco s good earnings performance, our expectations going forward are tempered by the fact that the volatility which allowed for this performance has been curbed by recent CBN FX market directives. And so, while we expect slower growth on some expense lines (interest expenses, OPEX), we do not expect that this will be enough to offset the drop in gross earnings due to the normalized NII. FBNH s earnings implies a P/E of 3.74x and 0.59x P/BV relative to the sector s estimates of 5.13x P/E and 0.73x P/BV. Based on a blend of Equity DCF, DDM, RIM and price multiples valuations we arrived at a fair price of NGN9.96. FY2014 EARNINGS UPDATE April 2015 Target Price: Rating: HOLD Relative Metrics Current price 9.51 P/E 3.74x P/B 0.59x Forward P/E 3.94x Div. Yield (FY13) 7.77% 52-Wk av. Vol (mn) Fundamental Metrics EPS 2.06 BVPS Net Margin 16.72% ROAE 13.92% ROAA 1.67% Cost to Income 64.30% NPL Ratio 2.90% Mkt. Cap (N bn) Key Price Metrics Today Return 0.11% WtD Return 9.31% MtD Return 9.31% QtD Return 9.31% YtD Return 8.07% 52-Week Return % 52-Week Hi Week Lo 6.35 Year Hi 9.57 Year Lo 6.37 Beta D-RSI Jolomi Odonghanro jolomiodonghanro@meristemng.com 1 P a g e NGN9.96

2 Financial Highlights (NGN billion) FIRST BANK OF NIGERIA PLC FY2014 Result Profit & Loss Account FY2014 FY2013 y/y Growth 2015.f Gross Earnings % Interest Income % Interest Expense % Loan Loss Expense % Net Interest income after impairment % Non-Interest Income % Operating Income % OPEX % PBT % PAT % Balance Sheet FY2014 FY2013 FY2015.f Cash and bank balances with central bank % Loans and advances to banks % Loans and advances to customers 2, , % 2, Financial Assets % Fixed Assets % Other Assets % Total Assets % 4, Deposits from banks % Deposit from Customers 3, , % 3, Borrowings % Other Liabilities % Total Liabilities 3, , % 4, Shareholders' fund % Per share data FBNH Current Price 9.51 EPS 2.54 BVPS Price multiples/ratios Corporate Actions Shares outstanding Proposed cash dividend 10 kobo/share P/E 3.74x Proposed bonus 1 for 10 P/BV 0.59x Cash Dividend yield 1.05% ROAE 16.66% Total Dividend yield 11.04% ROAA 2.02% Pay-out ratio 3.94% Net Interest Margin 7.60% Qualification date To be advised Cost of Funds 3.50% Closure date To be advised Cost to Income 66.70% Payment date To be advised Loan to Deposit Ratio 72.80% AGM Venue To be advised Net Margin 17.24% 2 P a g e

3 Analyst s Certification and Disclaimer This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the cover of this report. Each research analyst hereby certifies, with respect to each security or issuer covers in this research that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers (the Issuer); and (2) no part of any of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Research analysts compensation is determined based upon activities and services intended to benefit the investor clients of Meristem Securities Limited (the Firm). Like all of the Firm s employees, research analysts receive compensation that is impacted by overall Firm profitability, which includes revenues from other business units within the Firm. (3) each research analyst and/or persons connected with any research analyst may have interacted with sales and trading personnel, or similar, for the purpose of gathering, synthesizing and interpreting non-material non-public or material public market information. As at the date of this report, any ratings, forecasts, estimates, opinions or views herein constitute a judgment, and are not connected to research analysts compensations. In the case of non-currency of the date of this report, the views and contents may not reflect the research analysts current thinking. This document has been produced independently of the Issuer. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the ratings, forecasts, estimates, opinions and views contained herein are fair and reasonable, neither the research analysts, the Issuer, nor any of its directors, officers or employees, shall be in any way responsible for the contents hereof, and no reliance should be placed on the accuracy, fairness or completeness of the information contained in this document. No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Investment Banking. Investment Ratings Fair Value Estimate We estimate stock s fair value by computing a weighted average of projected prices derived from discounted cash flow and relative valuation methodologies. The choice of relative valuation methodology (ies) usually depends on the firm s peculiar business model and what in the opinion of our analyst is considered as a key driver of the stock s value from a firm specific as well as an industry perspective. However, we attach the most weight to discounted cash flow valuation methodology. Ratings Specification BUY: HOLD: SELL: Fair value of the stock is above the current market price by at least 20 percent Fair value of the stock ranges between -10 percent and 20 percent from the current market price. Fair value of the stock is more than 10 percent below the current market price. Definitions Price Targets: Price targets reflect in part the analyst s estimates for the company s earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or market, and may not occur if the company s earnings fall short of estimates. Asset allocation: The recommended weighting for equities, cash and fixed income instrument is based on a number of metrics and does not relate to a particular size change in one variable. 3 P a g e

4 Movements in Price Target Company Name: First Bank of Nigeria Holdco. Date Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 30/10/ HOLD HOLD 09/01/ HOLD HOLD 10/04/ HOLD HOLD New Recommendation Company disclosures Meristem or the analyst(s) responsible for the coverage may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally, affect the objectivity of this report. Material interests, which Meristem or the analyst(s) have with companies or in securities discussed in this report, are disclosed below: Company First Bank of Nigeria Holdco. Disclosure a. The analyst(s) hold(s) personal positions (directly or indirectly) in a class of the common equity securities of the company. b. The analyst responsible for this report, as indicated on the front page, is a board member, officer or director of the company c. Meristem beneficially owns 1% or more of the equity securities of the company d. Meristem has been the lead manager or co-lead manager of any publicly disclosed offer of securities of the company over the past 12 months. e. Meristem beneficially holds a major interest in the debt of the company f. Meristem has received compensation for investment banking activities from the company within the last 12 months g. Meristem intends to seek, or anticipates receipt of compensation for investment banking services from the company in the next 3 months h. The content of this research report has been communicated with the company, following which this research has been materially amended before its distribution i. The company is a client of the stock broking division of the Meristem group. j. The company is a client of the investment banking division of the Meristem group. k. The company owns more than 5% of the issued share capital of Meristem l. Meristem has other financial or other material interest in the company. Conflict of Interest It is the policy of Meristem Securities Limited and its subsidiaries and affiliates (Individually and collectively referred to as Meristem ) that research analysts may not be involved in activities that suggest that they are representing the interests of Meristem in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts reporting lines are structured so as to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in Meristem s Investment Banking or Sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the 4 P a g e

5 research analysts published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests. Important Disclosure For U.S. persons only: This research report is a product of Meristem Securities, which is the employer of the research analysts who has prepared the research report. The research analysts preparing the research report are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analysts are not subject to supervision by a U.S. broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Mersitem Securities only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. Legal entity disclosures Meristem Securities Limited is a member of The Nigerian Stock Exchange and is authorized and regulated by the Securities and Exchange Commission to conduct investment banking and financial advisory business in Nigeria. However, the company through its subsidiaries carries out stock broking, wealth management, trustees and registrars businesses which are regulated by the SEC and ICMR. 5 P a g e

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