Event

As expected, FBNH Plc (‘The Group’) maximised earnings given the upward trend of yields in the economy in Q2 2022. Total interest income grew by 41% YoY to N116.91bn in Q2 2022, primarily driven by interest income on loans and advances. On a year-on-year basis, the Group’s average loan book rose by 32% to an average of N3.13trn in H1 2022.  Therefore, the combined impact of higher loan volumes and yields on the loans culminated in the significant total interest income growth in Q2 2022. Also, on the back of a 24% YoY increase in investment securities to an average of N2.06trn in H1 2022, interest income earned on those securities grew by 47% YoY to N25.10bn in Q2 2022 – which also indicates that higher asset yields factored in the growth.

Burdensome Regulatory Costs Cap Bottomline Gains

Operating income grew by 16% YoY to N123.07bn in Q2 2022, on the back of higher net interest income. However, operating expense increased by 18% to N93.78bn. The increase in operating expenses majorly came from higher regulatory costs (which accounted for c.50% of overall opex growth). We note that a similar trend occurred in Q1 2022 when regulatory costs accounted for 74% of total opex growth. By implication, the Group’s cost-to-income ratio advanced by 100 basis points to 76% (Q2 2021: 75%).

Outlook

The Group’s performance in Q2 2022 was in line with our expectations. Over the next two quarters, we do not see any material deviation from our earnings growth drivers – we expect the upward trend of yields in the economy to boost earnings. We also expect fee and commission income to pick up over the next quarters.

Therefore, we maintain our earnings per share and valuation at N3.26 and N9.22, respectively. This implies a 2.83x estimated P/E ratio for the stock. The stock currently trades at a 3.36x forward P/E (i.e., N10.95). In our view, the underlying growth prospects of the stock do not justify the current valuation. We estimate a 16% price depreciation on the stock. Even with an estimated 4% dividend yield, the total return on the stock is -12%. We recommend a SELL.

Please follow the link “FBNH Plc Q2 2022 – Favourable Interest-Rate Environment Spurs Earnings”  to view the whole report.

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