FBN, FCMB, Equity Group, SBM & Stanbic Holdings: Are these Bank Holding Companies holding on or just holding up?

Dear Africa Interested Individuals:

                                                        In the past two years, some banks across Africa have undergone restructuring and adopted a holding company structure with the approval of their shareholders.  This new structure is supposed to be an asset to these banks and allow them to continue their strategy of being diversified business groups across the African banking space while dominating other banks that are not holding companies and have to stick to core banking and closely related activities.  

How are these holding companies faring across the continent and in comparison to banks without the holding company structure?  Is being diversified dazzling the income statement or damaging it?  Let us find out.

SBM Holdings Mauritius (Adopted holding company model less than a year ago)

SBM Holdings (SBMH) PBT margin for H1 2015 is 20.9%.  Net income declined 55% year-on-year to MUR 607m, largely due to an unforeseen impairment of one major conglomerate in the second quarter.  Credit impairment charges increased from MUR 214.47m to MUR 1,084.65m.  Gross earnings increased by 3.5%.   

Assets grew 6.8% largely on account of investment in gilt-edged investment securities.  Loans decreased by MUR 2.12B and gross loans also decreased.  This is not a case of net loans decreasing strictly due to increased impairment.  SBM has reduced its lending due to weak credit demand according to management.  SBM should go to Nigeria and they will get too much credit demand.  Deposits rose by 7.64% and NPL ratio rose from 0.96% to 2.1% year-on-year.  

Fixed assets rose 2%, debt rose 4% and equity declined 3% over the first six months of 2015.  Investment Securities increased by 23% and Trading Assets increased by 32% during H1 2015.  Interest income was 78% of Gross Earnings during H1 2015 which is more reflective of a core bank.  Interest income and expense experienced year-on-year the slightest of declines or what some will call flat.  The SBM Holdings management said it is pursuing regional expansion and other diversification actions.  Debt increased by 4.2% during H11 2015.   

Management said Mauritius experienced a downward review of economic growth prospects, while the industry has concerns over credit quality and weak demand, coupled with pressures on margins.  The first tactic for SBM under its new structure was to pursue increased trading of investment securities and other financial assets.  The second tactic is to embark on regional expansion.  In the meantime, the income statement has seen better days when the word 'holding' was not part of the bank's nomenclature.    

Equity Group Holdings Kenya

Equity Group Holdings (EGH) PBT margin for H1 2015 is 40.2%.  Gross earnings increased by 19%. Net income rose by 12% year-on-year.  There has been a steady growth in assets over the first two quarters of 2015.  Assets have grown 16.4% in six months and 32% year-on-year.  

EGH maintains most (70%) of its investment securities in the form of held to maturity and not available for sale.  Investment securities rose by 5% during H1 2015.  EGH is definitely adopting a different strategy in comparison to SBM Holdings as it relates to investments.  

Net loans to customers increased by 10.6% and credit impairment expense rose by 32%.  Net interest income also rose by 10.6%.  Interest expense increased by 27% while interest income rose by 13.5%.  The increase in non-interest income rose more than the increase in interest income by 8.4% year-on-year driven by agency banking transactions.  Non-interest income rose by 30%.  Deposits rose by 8% over six months and 40% year-on-year.      

Contingent liabilities to assets is 14% unlike Zenith at 78% which is mind-boggling and dropped me down with a thump.  Kenya Commercial Bank is 15.5% and the result is unaudited for both.  FBN Holdings said it will not reveal its contingent liabilities because its H1 result is unaudited.  I hope you can see all what Kenyan Banks are doing.  It is not all about profit; proper processes and procedures goes a long way also.  It is for issues like this that Nigeria's most expensive bank is trading at $0.11 while that of Kenya is trading at $2.30.       

Fixed assets rose by 12.4%.  Debt increased by 26.3% and equity rose by 1.9%.  Operating expenses rose by 22% as the bank invested in IT infrastructure and other business growth expenditures.  You see a bank still pursuing its core banking strategy successfully while pursuing other diversified business in conjunction with regional expansion.  Interest income was 64% of Gross Earnings for H1 2015.  This to me is more reflective of a bank holding company that is holding on and moving ahead as opposed to holding up and stalling the business or cannibalizing an area of previous strength.  

Management stated that the firm's growth path is focused on regional business interests, revenue diversification and dedication to foster lasting customer and strategic partnerships.  EGH overall goal is to become one of Africa's most respected and diversified business groups.  This is the only one out of these five holding companies with a clear and unique business model among which includes disbursing of loans through mobile banking.         

Stanbic IBTC Holdings

Stanbic IBTC Holdings (SIH) PBT margin for H1 2015 is 13.96%.  Gross earnings rose 11% while interest expense rose by 78%.  Net interest income (before credit impairment) declined 4%.   Net income attributable to shareholders declined by 46% largely due to a spike in interest expense followed by a 449% increase in loan loss expense.  Interest income is 61% of gross earnings for half-year 2015.  

Trading assets declined by 23%, financial investments declined by 43% and transaction income was flat.  Loans to customers was up by 3% and fixed assets was up by 4%.  Assets grew by 9% during H1 2015 drive by an increase in cash & cash equivalents which more than doubled over the first six months of 2015.  Equity rose by 8% and deposits rose by 22%.  Debt declined by 1%.  

SIH retreated from what it historically does best which is investments and then did poorly in core banking which has not been its core strength.  Taking in expensive deposits and then lending more funds to fellow banks than to customers is worthy of a "Grammy."  The result of 'neither here nor there' was a 46% drop in net income and a pre-tax income margin not even worthy of a pure bank more so, a holding company with diversified business operations.  

FCMB Holdings

FCMB Holdings (FCMBH) PBT margin for H1 2015 is 12.37%.  Gross earnings rose by 11% while interest expense rose by 27%.  Net interest income before impairment rose by 6% while loan loss expense increased by 48%.  Earnings per share declined by 14% year-on-year while net loans declined by 6%.  82% of gross earnings was interest income. 

Investment securities rose by 1% and trading assets rose by 437%.  Despite this 'investment aggression,' investment and other operating income declined by 6%.  Deposits rose by 6% over the first six months of 2015 and debt also rose due to a 14% increase in on-lending facilities.  Equity rose by 3%.  

FCMBH is the holding company with the lowest PBT margin and the highest share of gross earnings attributable to interest income.  EGH has the lowest share of gross earnings attributable to interest income and the highest PBT margin among the five bank holding companies evaluated.  The lesson here is if you say you are diversified, then, act diversified or your earnings may very well come in worse than before you diversified.  FCMB's H1 2015 result does not reflect the supposed benefits of diversification.  

FBN Holdings

FBN Holdings (FBNH) PBT margin for H1 2015 is 19.2%.  Gross earnings rose by 28% while interest expense rose by 47%.  Net interest income before impairment rose by 15.2% while loan loss expense rose by 239%.  Fee and commission income declined by 5%.  The bank achieved a 134% increase in forex trading income and a 1,470% increase in net gains on financial & investment securities.  These positive events enable net income attributable to shareholders to rise by 7% despite a 239% rise in loan loss expense and a decline in net loans of 4%.  75.9% of Gross Earnings was interest income. 

Nigeria's largest bank by deposits further increased its deposits by 2.5% over the first six months of 2015.  Fixed assets declined by 1% which is a subtle of consolidation and no more regional expansion as the financial behemoth battles to become more operationally efficient and get more from its many diversified parts.  Fee and commission income declined by about 7% which has typically been an area of strength for the bank.   

FBNH reduced its debt by 22% during H1 2015 which is the most significant decline among all five holding companies.  The bulk (85%) of FBNH's investment securities are in 'available for sale' as opposed to EGH where it is in 'held to maturity.'  This is another holding company hoping to get it right on investments as its loan book deteriorates.  So far, it has paid off as the spike in loan loss expense percentage wise and numerically, still enabled FBNH to earn a respectable PBT margin of 19%.  FBNH and SBMH are in similar territories.  Their loan books have gone shockingly bad and provisions spiked which led to increased interest in investment securities and other financial trading assets.  Net trading income increased by 79% for SBMH year-on-year.  Their pre-tax income margins are also pretty similar at 20.9% for SBMH and 19.2% for FBNH.  Interest income as a percentage of gross earnings is also similar at 78% for SBMH and 76% for FBNH.  

FBNH needs to understand that being a 'holding company' is more about diversification that it is about size.  Yes, when you diversify you will get bigger; the difference lies in getting bigger because you need to as opposed to because you can.  FBNH needs to seriously tackle the operational inefficiencies that are eating away it its efforts to generate return for its shareholders.  FBNH generates on average across its diversified network 18.5% more business than EGH.  The difference in H1 2015 PBT margin between EGH & FBNH is 21% which is more than the percentage difference between average business between FBNH & EGH!  FBNH has gotten a little too big to "milk itself."  Its time for some hard decisions from a human capital and a physical standpoint.

How are banks that are not holding companies in Africa doing?   Kenya Commercial Bank's PBT margin is 35.6% for H1 2015 while that of GT Bank Nigeria is 41.3%.  The holding bank wins out in Kenya while the non-holding bank wins out in Nigeria and overall.  GT Bank's interest income is 74.4% of gross earnings which is lower than FBNH & FCMBH.  

At the end of the day, pursuing a unique strategy that meets an unmet need will win the day for banks.  This goes beyond diversification and balance sheet size.  EGH gets the message as a 'holding bank' while GT Bank gets the message as a 'non-holding' bank.  

FBNH, SIH, FCMBH & SBMH (to a lesser extent) need to hold on and move ahead and stop holding up their own businesses by circling back and forth.  How?  Well, the strategy up to H1 2015 is not working which was more reactionary in nature than actionable in my opinion.  SBMH gets some slack as this is its first full year as a holding bank and it still earned PBT margin of 21% which is higher than all three Nigerian bank holding companies.  African banks need to "stay with it" instead of "hanging in there" if they truly believe in their approach to the business of banking.  Ghanaian banks have decided to lend in some cases in excess of their deposit base despite the inflationary and high interest rate environment that prevails in the country coupled with exchange rate volatility.  This is another example of staying with it and not just hanging in there.         

       Tell others to tell others about this Africa Research Blog; the financial truth is here.