First Bank of Nigeria, listed under the name FBN Holdings Plc, holds strategic position in the Nigerian financial services sector, the Nigerian economy, West African region, Sub-Saharan Africa (SSA) and the continent generally. As Nigeria’s flagship bank, First Bank determines, to a large extent, not only the outlook for Nigeria but the regional and continental banking dynamics. Capital Market Editor, examines implications of First Bank’s recent regional expansionary initiatives.
The banking sector generally is one of the axles on which the economy rotates. While the degree of influence of the banking sector differs from economy to economy, depending on the degree of sophistication and development of other segments of the financial industry, most emerging economies depend heavily on the banking sector. The current theory of “too big to fail” that features prominently in global regulatory framework underlines concerns about the impact of the banking sector, financial services industry, and the importance of the leading financial services companies. In Nigeria, like other African countries and emerging economies with less-developed non-bank financial market, the banking sector is the sector to track for the economic and investment outlook. To a very large extent, the Nigerian financial services industry, and the economy generally, depends on the banking sector.
The financial services sector accounts for about 30 per cent of total market capitalisation of the Nigerian stock market. Quoted banks and bank-holding groups account for more than 94 per cent of the market capitalisation of the financial services sector, which includes commercial deposit money banks, bank-holding financial services groups, mortgage bankers, insurance companies, microfinance banks, asset management companies and allied financial services companies. FBN Holdings Plc, the holding company for First Bank of Nigeria Limited (FirstBank), accounts for 14 per cent of the entire financial services sector and 15 per cent of quoted banks and bank-holding companies. There are 56 financial services companies quoted on the Nigerian Stock Exchange (NSE) including 12 commercial deposit money banks, 29 insurance companies, two microfinance banks, four mortgage bankers and nine other financial services firms. Among the nine other financial services firms are the three bank-holding groups-FBN Holdings, FCMB Group and Stanbic IBTC Holdings.
The big bank impact
The overall technical importance of First Bank is better appreciated within the context of the general market situation. At opening value today, FBN Holdings is bigger than each other sector and sub-sector on the NSE with the exception of its financial services sector, consumer goods sector and industrial goods sectors. Technically, FBN Holdings, on its own, holds significant influence on the overall market situation than several other individual sectors such as agriculture, oil and gas, construction, information and communication technology and healthcare among others. With capitalisation more than three times the size of entire populous insurance subsector, FirstBank’s pricing trend will exert more influence on overall market situation than the collective trend in several subsectors.
Fundamentally, FirstBank is Nigeria’s largest bank. With total assets of N3.3 trillion, customer deposits of N2.6 trillion and a strong capital adequacy ratio of 18.9 per cent, nearly twice the minimum 10 per cent requirement by the Central Bank of Nigeria (CBN), FirstBank ranks among the largest corporate and retail financial institutions in Sub-Saharan Africa. First-half report for the period ended June 30, 2013 underlined the fundamentals of the bank and the holding company. FBN Holdings grew its top-line to about N195 billion in the first half of this year, posting the largest revenue by any financial services group. Key extracts of the interim report and accounts of FBN Holdings, showed that gross earnings increased from N180.9 billion in first half 2012 to N194.9 billion in June 2013. The report showed improvements in all key indices, although the growths were marginal, the pervasive industry trend that has characterized earnings reports of banks in recent period. Profit before tax rose from N53.5 billion to N55.1 billion while profit after tax increased from N45.35 billion to N46.10 billion. The company expanded its balance sheet size to N3.4 trillion with total customer deposits of N2.6 trillion. Total customer loans and advances stood at N1.5 trillion. The group rested heavily on FirstBank, which recorded gross earnings of N186.1 billion and profit before tax of N49.9 billion in first half 2013. The bank’s aggregate balance sheet grew to N3.3 trillion by June 2013 as against N3.1 trillion recorded at the beginning of the year.
Financial conglomerate
Beyond the technical and fundamental figures, the structures and operations of FBN Holdings and FirstBank lend credence to its leading position. The most diversified financial services group in Nigeria, FBN Holdings operate products and services across commercial banking, investment banking, insurance and microfinance business in seven countries including its primary market and head office- Lagos, London, Paris, Johannesburg, Beijing, Abu Dhabi, and Democratic Republic of Congo. While the group rests primarily on FirstBank, other subsidiaries include FBN Capital, a leading investment banking and asset management company; FBN Life Assurance, a life insurance business; and FBN Microfinance Bank, which offers microfinance services. With some 1.3 million shareholders, FBN Holdings has the largest shareholders’ base.
The recent announcement of FirstBank’s expansion into West Africa through the acquisition of some of the operations of International Commercial Bank (ICB) marked a milestone in the expansion of Nigerian financial services companies within the sub-region and Africa generally. While African expansion has been at the forefront of Nigerian bankers’ strategies since mid 2000’s, FirstBank had cautiously concentrated on organic growth and consolidation of its domestic base. The strategy had worked out perfectly. While several Nigerian banks that had opened or acquired foreign operations in many African countries were either acquired or liquidated in the following financial and economic meltdown, FirstBank had further consolidated its leadership.
So why has the bank now decided to spread its wings beyond the shores of Nigeria? According to the management of the bank, the acquisition of ICB operations in West Africa is the next stage of growth and provides a strong geographic and commercial base from which FirstBank can continue to grow progressively in Africa. With operations in Guinea, Gambia, Ghana and Sierra Leone, ICB provides FirstBank with a strong geographic platform for growth and an established customer base across the mid-corporate, small and medium enterprises (SME) and retail segments that complement the bank’s existing strategy in Nigeria. ICB has over 600 employees and 120,000 customer accounts spread across these four markets. ICB also operates in markets with major investments in key growth sectors on the continent, most notably the major mining industries that are prevalent in Guinea and Ghana and emerging in Sierra Leone as well as positioned for the commercial operations in the emerging oil and gas opportunities in Ghana and Guinea. It should be noted that FirstBank had in 2011 acquired BIC in the Democratic Republic of Congo, starting its progressive and case by case approach to inorganic growth opportunities. Since acquiring BIC, the bank has successfully managed an integration process that has incorporated BIC into FirstBank’s operations while delivering short term improvements in financial performance as well. This is the strategy that it will further deploy to harness and integrate the synergies and opportunities presented by the latest ICB acquisition.
While many Nigerian banks are now actively expanding across the African continent and are implementing diverse business models as they seek to maximise growth, FirstBank’s approach customarily reflects its progressive approach. Its approach is rooted in the multi-local business model which ensures that the best of local culture and experience is mixed with the banking expertise the bank has built up over more than a century of operations. A multi-local business model is designed to ensure the markets where FirstBank is expanding retain the local culture and approach that make them an integral part of the local economy. By ensuring each FirstBank business across the continent adopts a locally led approach, while leveraging the international reach and experience of the parent company, the bank believes it can engender a long term sustainable approach to doing business in new markets, Africa in particular. “We are committed to developing a multi-local business model that broadens our geographic revenue base while providing enhanced service delivery to our new customers,” Group Managing Director, First Bank of Nigeria Limited, Mr. Bisi Onasanya reiterated on the confirmation of the acquisition of the ICB assets. According to him, the acquisition of ICBGFH assets in Ghana, Guinea, Gambia and Sierra Leone fulfilled the first stage of the bank’s ambitions to steadily build broader and more diverse footprints across Africa.
The new acquisition would also strengthen FirstBank against increasingly tough domestic operating environment and secure new markets for stronger growth momentum. In its latest ‘Banking Industry Country Risk Assessment (BICRA)’ on Nigeria, Standards & Poor’s Ratings Services had outlined operating challenges confronting Nigerian banking industry amidst the lop-sided economic system and deficient infrastructure. “The Nigerian banking sector has undergone two major consolidation periods in the past 10 years. In our opinion, the second phase is close to an end, although the future of the three quasi-nationalized banks remains unclear. As the new industry landscape clears, we expect competition to increase and the sector to continue to organize itself into three distinct tiers. Most rated banks are in the upper and middle tiers. Positively, with 21 banks operating in the sector, we don’t believe there is any significant overcapacity because of inherently low leverage and retail penetration, as well as strong long-term economic growth fundamentals. We anticipate stiff competition, however, on at least two fronts: attracting low-cost retail deposits in a country with low banking penetration, and banking large corporates together with their staff, third-party suppliers, and distributors. We believe foreign banks will continue to attempt to enter the sector in 2013-2014, but barriers to entry remain high for banks without significant capital or scale,” the report outlined the industry stability outlook. Both the challenges and opportunities represent better prospects for FirstBank with its large domestic scale and built-up retail base as well as the new openings presented by the ICB acquisition.
Onasanya said the ongoing domestic initiatives aimed at optimizing benefits of recent investments and countering pressures induced by regulatory changes would complement the bank’s expansionary drive to deliver greater earnings diversification and increase shareholders’ value through higher returns on equity among other benefits.
Under-pricing the potential?
However, the price of FBN Holdings appears to lag behind the gathering operational momentum. At opening price of N16.11 per share today, many analysts believe that FirstBank’s pricing trend is significantly below the current and future earnings potential. While it had traded at a high of N21.50, the current market price appears to be base-forming around the group’s low of N15.20 per share. The low price may conversely represent above-average yields for discerning investors that take opportunities of the time-lag to take positions ahead of the herd rush. With average year-to-date return of 38.61 per cent at the Nigerian equity market, several equities obviously are within their high band. But with several financial services stocks trading below average, the sector may well be next growth phase of the market. Investors only need to think and look beyond the immediate earnings to future earnings and sustainability.
