Financial Review

• Overview of Financial Results
• Economic Factors Impacting the Results
• Balance Sheet Analysis
• Income Statement Analysis
• Key Performance Indicators

Overview of Financial Results

The FirstBank Group weathered an exceptionally challenging year as the crisis in the Nigerian banking sector deepened. The financial performance of most Nigerian banks was significantly affected by a weaker operating environment and the CBN's examination, which required banks to reclassify a significant proportion of loans as non‐performing and to raise appropriate provisions in line with their findings.

In the nine months to December 2009, the FirstBank Group achieved moderate 20.3% annualised growth in gross earnings to N196.4 billion, from N217.6 billion achieved in the 12-month period to March 2009. Subsidiaries contributed 10.7% to the group's gross earnings (15.2%: March 2009). In the same vein, the Bank grew gross earnings at an annualised 26.7% rate over the nine-month period to N175.4 billion (March 2009: N184.5 billion). A marked increase in our funding costs, following a rise in term deposits as a proportion of total deposits, coupled with significant loan loss provisioning arising from deterioration in asset quality, negatively impacted underlying profit growth. Consequently, in the nine-month period under review, profit before tax for the Group declined to N11.6 billion (March 2009: N53.8 billion) while the Bank recorded profit before tax of N7.7 billion (March 2009: N46.1 billion).

The Group's total balance sheet plus contingent liabilities increased by 8.1% from N2.0 trillion (Bank: N1.7 trillion) in March 2009 to N2.2 trillion (Bank: N1.8 trillion) as at December 2009. This was driven mainly by growth in loans and advances. Shareholders' funds for the group declined to N309.6 billion (Bank: N317.5 billion) compared to N337.4 billion (Bank: N351.0 billion) as at March 2009. The decline was attributable to a reduction in retained earnings used for part payment for the prior year dividend.

Back to top

Economic Factors Impacting the Results

The global financial crisis was characterised by attendant systemic credit and liquidity crisis as interbank and wholesale funding markets stalled in the wake of fading confidence among financial institutions. Significant deleveraging followed as financial institutions realised assets to cover liquidity shortfalls, resulting in dramatic repricing of these assets. The lack of liquidity and significantly reduced risk appetite severely limited both the ability and willingness of financial institutions to finance normal corporate requirements, bringing about a slowdown in market activity.

With Nigeria not being very integrated within the global economy, the first-round impact of the global credit event was modest. However, the broader, second-round impact of the credit event was not long in coming. The principal negative, by virtue of its direct influence on spending by all three tiers of government and on the exchange rate, was the dramatic fall in the oil price from the second quarter of 2008 through to the first quarter of 2009. Another negative has been the reduction in external credit lines for Nigerian banks, such that businesses that are traditionally supported by foreign currency funds were adversely affected by the scarcity of dollar facilities during the year.

In a reflection of the cycle witnessed globally, Nigerian banks adopted a conservative lending posture, clogging the significant flow of credit to the private sector. Yields in the interbank market have continued to decline driven by the excess liquidity in the economy, with banks putting unutilised funds in government securities. In particular, the problems in the banking sector have meant that the Central Bank of Nigeria (CBN) has pumped around N620 billion into the banking system to support the ailing banks.

Back to top

Balance Sheet Analysis

Continued growth in total assets

Total assets for the Group rose to N2.2 trillion, 8.1% above the N2 trillion recorded as at March 2009, supported by growth in loans and advances.

Loans and advances performance

Loans and advances (LAD) for the Group, including advances under finance leases, increased in the nine months to December 2009 by 45.7% to N1.09 trillion (March 2009: N752.2 billion). In the same vein, the Bank grew LAD by 49.46% from N695.9 billion to N1.03 trillion. Along business lines, corporates were responsible for 26.7% (March 2009: 40.3%), consumer 10.2% (March 2009: 15.8%), retail 25.5% (March 2009: 33.6%), financial institutions 30.5% (March 2009: 9.2%), public sector 6.4% (March 2009: 0.14%) and SME 1% (March 2009: 0.98%) of the loan book. The major sectors of the loan book that recorded growth were finance and insurance, oil and gas, and retail services, while the manufacturing and consumer sectors recorded declines. Significant exposure to the finance and insurance sector was driven largely by money market lines granted to banks and discount houses for relatively short tenor, subject to roll-over, the risk of which is considered fair.

Fig 1. Seven-year historical trend – loans and advances

Deposits and current accounts

Total deposits for the Group expanded by 12.1% in the period under review from N1.2 trillion in March 2009 (Bank: N1 trillion), to N1.3 trillion as at December 2009 (Bank: N1.2 trillion). This growth was recorded at a time when the year end for the industry was harmonised, with competition heightened as banks sought to get a larger share of the customer's wallet. Positively impacting the growth in our deposit levels was continued expansion in our branch network, growth in our customer base, increased focus on alternative delivery channels such as ATMs, POS terminals and online banking, as well as increased product offerings.

Growing our deposits from such a large base, in the current environment, is testament to the strength of the FirstBank brand, the strength of our corporate relationships which continue to drive the direction of deposits as well as the confidence and trust placed in the institution by the general public.

Expectations for a wholesale flight to safety as depositors moved their funds en masse to the banks that had scaled through the audit did not materialise, largely due to the CBN guarantee of all deposits with the failed banks, as well as a strong appeal to large depositors within the corporates and the public sector not to move their funds.

Fig 5. Seven-year historical trend – deposits

Back to top

Income Statement Analysis

Gross earnings

In the nine-month period under review, the Group recorded gross earnings of N196.4 billion, compared to N217.6 billion recorded in the 12-month period to March 2009. This represents annualised growth of 20.3%. Over the same period, the Bank also recorded gross earnings of N175.4 billion (March 2009: N184.5 billion), translating into annualised growth of 26.7%. Interest from loans and advances remained the major contributor to total interest income, while other sources such as placements with local banks, and treasury bills accounted for the balance.

Fig 8. Seven-year historical trend – gross earnings

Overall, while interest income benefited from growth in volume of earning assets, there was slight deterioration in the interest yield on total assets to 10.9% from 11.2% as at March 2009. In addition, as a result of the deterioration in asset quality, and ensuing significant growth in nonperforming accounts, especially following the special audit carried out by the CBN/NDIC, growth in interest income was negatively impacted by the suspension of interest accrual on non-performing loans in line with requirements of the Nigerian GAAP.

Furthermore, the CBN's guarantee of the interbank market, coupled with heightened levels of risk aversion within the banking sector, and consequent adoption of more conservative lending strategies, banks' existing free funds and new monies were channelled towards low-risk securities. Not surprisingly then, a combination of these factors led to a steep decline in interbank rates as well as rates on treasury bills and FGN bonds – thus impacting growth in interest income from these sources further. Underscoring a continuation of this trend in the current year, as at March 2010, in excess of N400 billion was on average deposited at the CBN at 1% (revised lower from 2% in Feb 2010).

For the group, non-interest revenue grew at an annualised rate of 11% to N34.4 billion (March 2009: N41.3 billion), representing 17.5% of gross earnings, and was negatively impacted by the slower pace of economic activity. Growth was driven by fee and commission income (primarily commission on turnover and credit-related fees), income from investments as well as foreign exchange income.

Net interest income and margin analysis

The FirstBank group continues to enjoy one of the lowest cost of funds in the industry, by virtue of its large base of small savers whose principal consideration is the safety of their funds. In spite of this, there has, however, been a general increase in the weighted average cost of funds across the banking industry, driven by the rise in the proportion of time deposits to total deposits as shown in figures 12 and 13.

This trend was driven by a number of factors including intense competition across the industry to shore up deposit bases ahead of the common year end as previously discussed, some level of asset substitution from the equity and real estate markets to the money market as well as an increasingly sophisticated customer base. In line with this trend, in the period under review our blended average cost of funds increased by 230 basis points to 6.5% (March 2009: 4.8%).

Fig 12. Five-year historical trends – cost of funds (%)

In addition, given that loans and advances are about 49% of our total assets base, money market and treasury bill yields are a key driver of interest income. Thus, as highlighted previously, declining rates on treasury bills and the interbank market, coupled with a liquidity glut from continued risk aversion within the sector, put further pressure on our margins.

Fig 14. Five-year historical trends – yield on treasury assets

Overall, in the nine-month period to December 2009, net interest income for the Group grew at an annualised rate of 7.1% to N96.2 billion (March 2009: N119.7 billion). From the foregoing, growth in interest expense significantly outstripped growth in interest income, exerting downward pressure and leading to a narrowing of our net interest margins to 6.4% as at December 2009 from 7.1% as at March 2009.

Fig 15. Five-year historical trends – net interest income

Risk provisions

The challenging operating environment led to a rise in delinquency rates, which pushed our non-performing loan portfolio from N36.5 billion of total loans as at March 2009 to N93.9 billion as at December 2009. This led to further deterioration in our non-performing loan ratio for the Group to 8.2% (March 2009: 4.8%). The decline in asset quality is as a result of the deterioration in margin trading facilities, loans secured by quoted shares, loans to the oil and gas sector and a generally weaker credit environment.

Fig 16. Seven-year historical trend – non-performing loans

Risk provisions, which include write downs of and value adjustments to claims and certain securities, as well as additions for possible loan losses, rose significantly by 170% to N63.1 billion as at December 2009, compared to N23.4 billion in March 2009. Our cost of risk has thus increased from 2.2% as at March 2009 to 4.6% as at December 2009.

Fig 17. Increasing impact of deteriorating asset quality

We cannot deny the impact the global and domestic financial crisis continues to have on our customer base. Our exposure as at December 2009 secured by shares (quoted and unquoted) stood at N53.1 billion, representing 4.79% of total loan portfolio (TLP). However, exposure against quoted shares was N30.9 billion.

While currently originating quality new business, we continue to ensure the appropriate strategies are in place to minimise rate of NPL formation. These include a heightened focus on early identification of problem accounts, collection capability and efficiencies, proactive rehabilitation policies and processes. On our margin loan accounts, the remedial strategy is to recover past due obligations on non-performing accounts, restructure performing exposures against realistic cashflows and pursue a gradual workout. Depending on the rate at which economic activity improves, we expect the overall asset quality picture to remain challenging for the industry in 2010 as loan books season.

Operating expenses

Our operating expenses in the nine months to December 2009, at N78.3 billion, recorded annualised growth of 19.1% relative to the March 2009 levels at N87.7 billion, exceeding annual average inflation rate of 11.8% over the period under review. Staff costs at 51.8% of total operating expenses remained the major component, and were contained, rising 7.8% on an annualised basis – well below the average rate of inflation. As a proportion of gross earnings, this improved to 20.7% from 23.1% as at March 2009.

Administrative and general expenses constituted 32.1% of overall costs and recorded annualised growth of 22.8%, reflecting the high inflation environment, as well as higher expenditure on information technology to maintain, enhance and expand the core network. This, in addition to continued branch expansion contributed to the 19.2% annualised growth in depreciation costs.

Cost to income ratio for the group as at December 2009 was 73.4% (Bank: 66.4%), compared to 72.0% (Bank: 67.8%) as at March 2009.

Profits

In such challenging conditions, the Bank achieved profit before tax of N7.7 billion, down an annualised 77.8% from N46.1 billion recorded as at March 2009, while Group profit before tax declined 71.3% to N11.6 billion, from N53.8 billion over the same period. On an after-tax basis, while the Group recorded a decline in profit of 66.2% to N3.2 billion (March 2009: N12.6 billion), the Bank's profit declined 95.2% to N1.2 billion from N35.1 billion over the same period.

Fig 21. Seven-year historical trend – profit before tax

Liquidity management

The global financial crisis, oil and gas, as well as margin lending related exposures by the domestic banking industry continued to have adverse effects on the liquidity and funding risk profile of the Nigerian banking industry.

As at December 2009, the Group had a liquidity ratio of 32% (March 2009: 48.2%), significantly above the 25% regulatory requirement. The decrease in the liquidity ratio was driven predominantly by growth in our risk assets.

Further information on our liquidity management is contained in the Risk Management section.

Funding

Our strong deposit gathering franchise ensured that we remained about 68% funded by deposit liabilities, consisting of well-diversified corporate and retail deposits.

In the wake of the global financial crisis, while lines of credit were cancelled or cut back for a number of banks in the country, we experienced growth in our lines and increased request for correspondent banking relationships – reflecting our status as safe partner for strategic intervention in Nigeria by foreign financial institutions. Our relationships with Export Development Canada (EDC) and European Investment Bank (EIB) were deepened with additional facilities, while discussions with DEG (German DFI), Proparco (French DFI) and International Finance Corporation (IFC) are at different stages of completion.

Capital management

The group achieved a capital adequacy ratio of 15.8% at the end of December 2009. While this is lower than the 24.3% recorded for the period ended March 2009, it is far in excess of the regulatory requirement of 10%. The reduction was driven by the increase in loans and advances during the year.

Fig 23. Seven-year historical Bank trend – tier 1 capital adequacy plus total capital adequacy ratio

Fig 24. Seven-year historical trend – total risk weighted assets

Key Performance Indicators

In this difficult environment return on equity declined to 1.03% (March 2009: 3.73%). Basic earnings per share for the group declined to 10.99 kobo (March 2009: 50.5 kobo) and net asset value per share declined to N10.7 (March 2009: N13.6).

Back to top