FBN Holdings Plc gained significant speed in growing the size of the balance sheet in 2020. Total assets grew by 17.8 percent over the first nine months of the year to September – the highest increase in seven years.
Lending to customers grew by 11 percent to over N2 trillion at the end of the third quarter from the closing figure in 2019. This is the second year the bank is growing customer credit after two years of a cut down.
Loans and advances to other banks also grew by 8 percent to N816 billion but the investment portfolio declined by 10 percent to about N1.3 trillion over the same period. Liquid assets led the asset expansion programme of the bank with cash and bank balances growing by 71 percent to nearly N1.8 trillion at the end of the third quarter.
Asset growth was financed by a 15 percent increase in customer deposits to N4.6 trillion in nine months, a 71 percent advance in other liabilities to N509 billion and close to 30 percent growth in deposits from other banks.
Getting the assets to contribute to revenue improvement was the challenge to the bank’s management in 2020. Gross earnings slowed down across the three quarters of the year and closed at N439 billion at the end of the third quarter operations. This represents a 5 percent increase over the period compared to the almost 18 percent expansion in assets.
The drawback on revenue performance came from interest earnings, which went down by 7 percent year-on-year to N298 billion at the end of the third quarter. The increase in credit volume did not lead to an increase in earnings over the review period.
Non-interest income however made up for the drop in interest earnings and accounted for the revenue improvement at the end of the third quarter. The upbeat came from two income lines, which are net gains on sale of investment securities and net gains from financial instruments. The two income lines recorded exceptional growths of 452 percent to over N41 billion and 122 percent to N7.7 billion respectively over the review period. With the drop in interest income, revenue performance was far behind the expansion in assets in the year. That resulted in a decline in asset turnover from 0.1 at the end of last year to 0.08 at the end of the third quarter.
The bank’s management took steps to extract an increased margin of profit to compensate for the slow growth in earnings. Interest expenses provided the cost saving centre, dropping by close to 10 percent year-on-year to N105 billion at the end of the third quarter.
The ability to save cost from interest expenses reflects both a strong growth in customer deposits and a drop in average cost of funds. Customer deposits expanded by 15 percent to N4.6 trillion at the end of the third quarter. This represents an addition of N600 billion to the customer deposit portfolio over the nine months of the financial year.
The cost saving strengthened net interest income but a resurgence of credit impairment expenses posed a hurdle on the way. Fiscal 2020 was a year in which three years of rapidly falling credit loss expenses gave way for a high speed upward run for FBN Holdings.
Over the preceding three years, the bank recorded a sustained drop in loan impairment expenses from the height of N226 billion in 2016 to N51 billion at the end of 2019. A change of trend happened last year with a 64 percent rise in risk asset quality impairment year-on-year to about N47 billion at the end of September.
The development was a major challenge to management that is still working frantically to rebuild profit to match the level attained as far back as 2014. Profit improvement slowed down, as loan losses claimed an increased proportion of the bank’s revenue.
The drop in credit loss expenses over the preceding three years had powered an average growth of 85 percent in profit over the years. Conversely, the rise in the loan loss charges last year set the pace for the lowest profit improvement for FBN Holdings in four years.
As credit losses rose, profit growth slowed down from 63 percent in the first quarter to 31.5 percent at the end of the third quarter. That remains a top record profit growth by industry standard and in consideration of the challenging operating climate of 2020.
FBN Holdings maintained its profit recovery pedestal for the fourth straight year. It is yet to return to the peak net profit figure of N84 billion attained as far back as 2014.
Improved ability to convert revenue into profit is a key strength for the bank in operations last year. The third quarter operations ended in September 2020 with an after tax profit of N68 billion for FBN Holdings, which is a year-on-year growth of 31.5 percent.
Improvement in profit margin is the strength to grow profit in the face of moderate revenue improvement. It pushed up profit margin from 12.4 percent in the same period last year to 15.5 percent at the end of the third quarter in September 2020.
This is the highest net profit margin for the bank in six-years, well ahead of the closing mark of 11.2 percent for the 2019 financial year. It enabled the bank to grow profit more than six times ahead of revenue at the end of the third quarter.
Return on assets
FBN Holdings recorded a return on assets of 1.2 percent at the end of the third quarter, which is an uptick from 1.1 percent at the end of 2019. The bank experienced weakness in improving returns from the flow of assets into revenue, as evidenced by the decline in asset turnover. It gained strength however in converting revenue into profit as indicated by the gain in net profit margin.