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Company of the month First Bank Of Nigeria LimitedFirst Bank of Nigeria Limited (formerly Standard Bank of Nigeria Limited) was Incorporated on March 31, 1894 as a Limited Liability Company with its Head Office in Liverpool, UK, First Bank of Nigeria Plc (FBN) started operations with a paid up capital of 12,000 pounds sterling under the corporate name of the Bank of British West Africa Limited. In its early years, FBN grew rapidly working in close association with the colonial government and performing traditional roles of a central bank in the West African sub-region. First Bank of Nigeria was incorporated locally in Nigeria in 1969 as Standard Bank of Nigeria Limited. In 1979, the ownership structure of the Bank was changed to include the Nigerian Government and public, and its name was subsequently changed to First Bank of Nigeria Limited. First Bank of Nigeria was quoted on The Nigerian Stock Exchange in 1979 and adopted its present name in 1991. First Bank of Nigeria, which until 1996 was owned 9.9% by Standard Chartered Africa Plc, is now 100% owned by the general public. The principal activity of FBN is the provision of a wide array of banking services in Nigeria. First Bank of Nigeria has several subsidiaries including FBN Bank (UK) Limited, First Trustees Nigeria Limited; First Registrars Nigeria Limited; First Funds Nigeria Limited, First Insurance Brokers Limited, FBN Mortgages Limited, FBN Capital Markets and First Custodians Limited. The Bank also has an associate in the discount house business, Kakawa Discount House Limited and interest in Banque International Du Benin (BIBE), Valucard, Afrexim Bank and Nigeria Interbank Settlement System.First Bank of Nigeria adopts a branch network initiative, which involves retaining its customers by flooding the market with a flurry of bank branches (394 as of December 2006) so as to bring a wide array of banking activities and services including Corporate, Retail and Mortgage Banking, Registrarship, Private Equity Financing, Trusteeship and Insurance Brokerage to all groups and classes of Nigerians. As part of its strategy of ‘progressive internationalisation’, First Bank of Nigeria in November 2002 established a subsidiary in the United Kingdom. The Bank also adopts a strategy of restructuring and re-branding and has changed its name, brand and structure several times since inception so as to reposition and exploits the returns available in the changing environment.Unique StrengthsFirst Bank of Nigeria is the leader in the Nigerian Banking industry in many respects. With the largest market capitalization in the industry also having one of the largest deposit base as at the end of the 2006 financial year, it caters for a wide variety of client categories in every segment of the economy. Its main strengths are in its pervasive branch network (one of the largest in the market with vast rural inroads which reaches into almost every corner of the country placing it in a unique position in terms of ability to mobilize low cost funds; a critical success factor in the industry) and its huge deposit base which is composed of funds mobilized from all segments of the market. Its size has not always been beneficial though as the Bank has had difficulty matching the dynamism in service delivery offered by new entrants into the industry. With this in view, the Bank embarked on an operational restructuring exercise, aimed at repositioning itself in line with emerging trends particularly as concerns the deployment of information technology as a way of enhancing service delivery as well as improving efficiency and rationalizing its internal processes. It recently adopted a decentralized structure consisting of 14 area offices, each with a limited number of subordinate branches. This is aimed at leveraging its IT initiatives to craft a less bureaucratic business model and enhance customer service through a more pliable decision making configuration.STRENGTHS• Strong brand name• Good track record of execution capabilities & returns to shareholders• Large deposit base• New & innovative productsWEAKNESSES• Increasing operating costs• Difficulty in matching the dynamism in service delivery offered by newer banks because of its size• Poor customer service and IT innovation when compared to newer entrantsOPPORTUNITIES• The role as a pension fund custodian offers new opportunity for the group• With increasing awareness and agitation for mortgages & mortgage-backed securities, FBN Mortgages Limited might play a leading role.THREATS• Declining market share• Stiff and increasing competition from newer entrants (post consolidation)Earnings and MarginsGross Earnings for First Bank of Nigeria increased from N29.7 billion in 2000 to N57.255 billion in 2005, representing a Compound Annual Growth Rate (CAGR) of 15.45% during the period. Based on the Bank’s latest results for the financial year ended March 31 2006, gross earnings increased to N67.44 representing a 17.79% increase over the 2005 figure. During the same period Profit Before Tax (PBT) increased year on year from N5.7 billion in 2000 to N21.833 billion in 2006. Analogously Profit After Tax (PAT) increased from N4.7 billion to N17.383 billion between 2000 and 2006. FBN’s interest earnings, which represented 57% of total earnings in 2000, have increased from N16.8 billion to N36.4 billion in 2005 (interest earnings accounted for 63% of total earnings in 2005). Based on the Bank’s 2006 report, this figure has increased to N40.743 billion (60.4% of gross earnings). The Bank’s net interest income has however, increased to N30.7 billion in 2006 from N29.1 in 2002. Interest earned by FBN from its core activity (i.e. lending) i ncreased to N14.2 billion in 2004 from N10.35 billion in 2002 (8.40% CAGR growth). This amount has increased to N17.08 billion in 2005. Commissions and other income, which comprises foreign exchange income and fees and commission, grew by more than 24.47% CAGR between 2002 and 2006 from N7.5 billion to N26.69 billion.Company: First Bank of Nigeria Plc (“FBN”) Recommendation BUY (Long Term) Current Price: N40.70 PAT: N17.38 billion Projected PAT: N20.00 billion Number of Shares: 10.45 billion EPS: N3.32 Projected EPS: N1.91 Market Capitalization: N426 billion PE Ratio: 12.3 Projected PE Ratio: 21.31 Appreciation to Date: 154.81% (adjusted for the bonus; 1 for 1) This publication is for information purposes only. The IBTC Group and its employees make no representations as to the accuracy and completeness of the information contained in this bulletin. We therefore accept no liability for any loss arising from the use of such information. Enquiries in relation to any of the matters herein may be directed to Yemi Kale 01 2626520 ext 1171.Net Profit Margin (NPM) and Gross Profit Margin (GPM) has both declined for First Bank of Nigeria since the turn of the century. In terms of NPM, the figure below shows that FBN with 22.22% in 2001 and 25.77% in 2006 has been around the industry average (25.1% in 2001, 24.2% in 2004 and 20.4 in 2005) since the turn of the century. The Bank’s GPM has also increased from 20.36% to 32.37% during the period. Of all the fundamental ratios that investors look at, one of the most important is return on equity (ROE). It is a basic test of how effectively a company's management uses investors' money. ROE shows whether management is growing the company's value at an acceptable rate. ROE for the bank increased to 28% in 2006 from 24% in 2002. This tells us that FBN generated a 28% and 24% profit on every naira invested by shareholders in 2006 and 2002 respectively. This is quite commendable considering the fact that the Company has issued script issues in the last five years. Operating costs for First Bank of Nigeria has continued to increase since the turn of the century from N14.71 billion in 2000 to N29.4 billion in 2005 and N35.3 billion in 2006. In 2000, the Banks operating costs to income ratio stood at 49.52%. In 2005, this ratio increased to 66.4% and to 67.4% in 2006 While operating expenses and the costs to income ratio appears alarmingly high, it must be noted that it has been largely due to FBN’s acquisition of information technology and related equipment to complement expansion and efficiency. This coupled with rising fuel price increases has resulted in an increase in the Bank’s operating expenses and its costs to income ratio. That being said, it should be noted as mentioned earlier that the Bank has still been able to increase its PAT despite the significant increase in its operating expense as well as regulatory constraints on foreign exchange transactions. Therefore, overall returns for FBN though on a slight decline are in the opinion of our analyst satisfactory. What is more, it is one of the best in the industry. Our analysts are also of the opinion that income streams for FBN remain assured and sustainable. However, costs management measures need to be improved and strategies to further drive revenue generation should be adopted. Given the new capital requirement, which the Bank has been able to meet, its ability to organize resources efficiently to render adequate returns will become one of the necessary conditions for it to remain the country’s leading bank.Asset QualityFirst Bank of Nigeria recorded a 92.9% increase in total assets and contingents between 2000 and 2005, placing the Bank’s balance sheet at N470.8 billion in 2005. In 2006, total assets increased to N614.8 billion. The assets of the Bank based on FBN’s 2005 report are displayed below with Cash and short-term funds representing the largest proportion at 34.4% (or N162.1 billion) of total assets followed by bills discounted at 22.4% (N105.624 billion) and loans and advances at 26.3% (or N123.7 billion). In 2006 cash and short term funds representing 36% (N220.6 billion) of total assets. Bills discounted represented 17.6% while loans and advanced accounted for 28.8% of FBN’s total assets.Liquidity and Liability GenerationFBN’s funding cost declined marginally from 4.2% in 2000 to 3.2% in 2004. The Bank’s total deposits and current accounts which was N255 billion in 2004 (64.5% growth from 2000) was composed largely of demand and savings deposits, which together accounted for more than 85% of the total. In 2005, FBN’s total deposits and current accounts increased by 30.20% CAGR to N332.1 billion. This figure currently stands 448.9 billion in 2006. In 2005, liquid assets for First Bank of Nigeria represented 87% of total deposits (94% in 2002), which complies with the stipulated minimum requirement of 40%. In 2006, this figure was declined to 92.2%. A review of the maturity profile of First Bank of Nigeria deposits shows that a larger proportion of deposits were held in the 30 to 90 days range which further reflects the increasingly short term nature of the Bank’s lending activities. This probably reflects the high inflation environment and depositors unwillingness to hold their funds in local currency for long periods. However, with the recent introduction of FGN bonds, the introduction of the Pension Reform Act and as investor confidence increases, our analyst expect a change in FBN’s deposit base as longer term fund begin to emerge in the Nigerian banking sub-sector. As a whole, our analysts are of the opinion that First Bank of Nigeria remains satisfactorily liquid.Back to Categories