FBN Holdings: Even An Elephant Can Have A Bad Day

FBN Holdings, parent company of First Bank of Nigeria Limited (FirstBank), is smarting from perhaps its biggest mishap since the days of Elder Dempster when business risks were reduced to shipwrecks and attacks by sea pirates.

The financial holding company, which did about 90% of its trading with its number one subsidiary, FirstBank, had bet (and lost) on rising oil prices in the 2015 financial year and is paying dearly as net profit reached a nadir of N15 billion, down by a staggering 82 percent from N84 billion in the previous year.

As the financial community is now aware and perhaps, debating, the financial behemoth had to write down the holes occasioned by the heavy exposure, reason for the uninspiring showing. Impairment charges rose to a record level of 450 percent over the previous year to N119.32 billion from a mere N25.94 billion.

The singularity of the losses and indeed those of other banks that piled their baskets with oil assets should force a rethink on how to invest in Nigeria. Oil has been known to be a volatile asset and as such requires more stable assets to hedge such bets.

Now is the time to think agriculture, heavy industry equipment, SMEs, biotechnology, information and communication technology, among other very viable sectors.

The refrain by the banks upon such a recommendation would be ‘but we have been doing that’. Not enough! Not enough to spike the level of productivity required to launch the country into a strong emerging economy globally.

The banks have been putting in too little to vault the country in the direction long seen by visionaries like Jim O’Neil of Goldman Sachs who lumped the country with South Korea, Turkey, Indonesia, Egypt, Vietnam, Mexico, Bangladesh, Iran, Pakistan and the Philippines in a wily block of countries expected to compete for economic glory in the next few decades.

FirstBank’s ability to throwing loans to get the country in that direction was severely hampered in the period under review, as loan and advances item on the bank’s balance sheet shrank 16 percent from NN2.18 trillion to N1.82 trillion.

It would appear the bank also soft-pedaled on deposit mobilization, growing by a mere 2.6 percent to N2.97 trillion from N3 trillion.

A negative trajectory for loans and a snail speed deposit level helped temper the bank’s credit risk as loan deposit ratio shrank to 61.1 percent from 71.4 percent. This is below the CBN threshold of 80 percent.

But the bank was ambitious in its investment activities in the period as its cash flow on investing activities vaulted more than 1,500 percent, signalling that the bank is poised for bigger growth in the new financial year.

In the year under review, the bank grew earnings by a measly 4.8 percent from N481.77 billion to N505.19 billion on the back of a modest rise in net interest income, which rose 8.7 percent from N243.85 billion to N265 billion.

The story got uglier after all the cost items are considered as the profit line gave way and sank 77 percent to N21.5 billion from N93.5 billion. The frenetic drop is mirrored by pre-tax profit.

FBN Holdings had issued a profit warning last February on its 2015 performance, saying things may not look pretty, saying the action was driven by the challenging macroeconomic environment, coupled with fiscal and monetary headwinds, which have resulted in marked reduction in domestic output.

Despite the expected ebb in returns, shareholders would not be in a hurry to dump the bank with 122 years experience of navigating the Nigerian market.

This adds weight to the bank’s assurances when it gave the profit warning, assuring that it is making moves to ensure better performance in the 2016 financial year, including identifying which of its businesses are likely to help deliver on the promise.

“This is a prudent measure being taken while the bank has commenced active remedial action on the specific impaired accounts. Our merchant banking and asset management as well as insurance business remain strong and resilient,” the bank had revealed.

The management of the group, however, reaffirmed that it would focus in 2016 on restoring shareholder value by driving improvements in underlying asset quality, cost efficiency, enhancing revenue generation and extracting synergies across the group, as well as growth through innovation.

In 2014, the bank improved net profit from N70.6 billion to N82.8 billion, on the back of vaulting gross returns of N480.6 billion, from N396.2 billion in 2013.