FBN Holdings Plc rights issue: The takeaways

FBN Holdings Plc (FBNH), one of Nigeria’s leading financial institutions, has launched a rights issue of 5,982,548,799 ordinary shares at N25.00 per share.

This rights issue, aimed at raising N149.56 billion, is a strategic step to ensure compliance with the Central Bank of Nigeria’s (CBN) capital requirement. Beyond regulatory compliance, the proceeds are expected to bolster liquidity, enhance financial stability, and position First Bank of Nigeria Limited, FBNH’s flagship subsidiary, for sustained growth and strengthen its position within the competitive Nigerian financial landscape.

The offering, based on an entitlement of one new ordinary share for every six shares held as of the qualifying date, 18 October, 2024, appears to have been well-received by the market.

On 4 November, the opening day of the rights issue, FBNH’s share price closed at N26.80, reflecting a 7.6% appreciation above the issue price.

The stock has since climbed further, trading at 9.6% above the issue price as of close of trading on 18 November, 2024. Looking at the five-year average share price of N14.59, last year’s closing price of N23.55, and this year’s average price of N25.75 reflect a significant growth trajectory for FBN Holdings.

Evaluating strategic benefits for shareholders

For shareholders, the primary concern lies in assessing the strategic advantages of participating in the rights issue and understanding how the additional funds will bolster the bank’s financial stability and drive future growth.

FBN Holdings Plc (FBNH) has outlined a strategic plan for deploying the N149.56 billion proceeds, focusing on fortifying its financial health, seizing growth opportunities, and maintaining a competitive edge in Nigeria’s banking sector.

Strengthening capital adequacy

According to the rights issue circular, a significant portion of the proceeds; N103.12 billion (68.95%) will be allocated to enhance First Bank’s Capital Adequacy Ratio (CAR). This includes N77.34 billion directed toward corporate lending and N25.78 billion toward the retail segment.

FBNH reported a CAR of 17.75% in the first half of 2024, and the additional capital will serve as a critical buffer against financial shocks while ensuring compliance with the Central Bank of Nigeria’s (CBN) regulatory requirements.

This is particularly critical in a high-risk environment marked by currency fluctuations, inflationary pressures, etc.

Driving profitability through lending expansion

A significant portion of the proceeds are earmarked for expanding lending activities, positioning FBN Holdings to drive profitability through increased interest income. The bank’s recent performance highlights the potential: In 2023, loans and advances grew by 72% year-on-year to N8.61 trillion from N5.01 trillion in 2022.

This growth trajectory continued into 2024, reaching N12.73 trillion by the end of September. Increased lending capacity contributed to a 165% rise in interest income during the first nine months of 2024, totaling N1.633 trillion. Of this, N1.094 trillion, 67% of total interest income was generated from loans and advances. However, the bank’s ability to capitalize on this growth depends on how effectively it can manage credit risk. The current economic environment poses heightened risks, as evidenced by the bank’s rising cost of risk, which reflects the potential for higher loan defaults.

According to the bank, cost of risk rose by 35% to 2.70% in the first nine months of 2024, following a 94% increase to 3.30% in 2023, highlighting elevated credit risk exposure within the bank’s loan portfolio. While the expanded lending capacity is expected to boost profitability, it is crucial to ensure that this growth does not amplify credit risk, which could erode shareholder value.

It is encouraging to note that the rights issue circular reveals that N29.46 billion (19.7% of the rights issue proceeds) has been allocated toward expanding its international presence.

This strategic move will not only diversify the bank’s revenue base but also mitigates risks associated with over-reliance on the Nigerian economy, which remains vulnerable to currency and commodity price fluctuations. By leveraging its international operations, FBNH can create more stable income streams and reduce its exposure to domestic economic volatility, enhancing its resilience and safeguarding shareholders.

Takeaway for shareholders and investors

The rights issue not only provides existing shareholders an opportunity to strengthen their holdings at a discounted price but also strategically positions First Bank Holdings (FBNH) for future growth. However, the implications for market valuation must also be considered.

Discounted price advantage

Shareholders can acquire new shares at N25, below the year’s average share price of N25.75 and significantly lower than the N43.95 52-week high recorded on 19 March, 2024. This discounted pricing presents a cost-effective entry point, offering unrealized gains if the market price remains above the offer price.

Market valuation and dilution impact

Currently, FBNH has the fourth-highest market capitalization among Nigerian banks at N963.789 billion. With the issuance of 5,982,548,799 new shares, the share count will rise to 41,877,841,591, which will likely impact the price per share in the short term, as the market adjusts to the expanded equity base.

If the bank continues to grow its earnings and profitability at the current pace, the expanded equity base could push its market valuation beyond N1 trillion, provided the share price either holds steady or appreciates.

This outcome depends largely on how effectively the proceeds from the rights issue are utilized. By strategically deploying the funds to expand lending, diversify revenue streams, and strengthen credit quality, the bank can sustain profitability and build investor confidence.

Positive sentiment in the market could drive demand for shares, supporting the share price and helping the bank achieve a higher market valuation.

Ultimately, the success of this strategy will hinge on the bank’s ability to demonstrate that the rights issue is a key driver of long-term growth and value creation.

Earnings and book value growth

Analysts’ projected decline in EPS (TTM) from N16.65 to N15.31 by December 2024 reflects short-term dilution. However, with PAT already up by 126% year-on-year in the first nine months of 2024, reaching N533.877 billion, the bank is showing strong potential to offset the dilution impact.

Furthermore, the book value per share rose to N72.3 in September 2024 from N38.3 in September 2023, highlighting the significant enhancement of shareholder equity and intrinsic value.

Long-term growth prospects

The proceeds from the rights issue, allocated to boosting lending capacity, fortifying international expansion, and enhancing digital infrastructure in a competitive market, could drive sustained profitability and market leadership.

Overall, the rights issue appears a compelling opportunity for shareholders to benefit from discounted shares and position themselves for future growth.

However, the increased cost of risk is a factor that requires careful attention. With the rising cost of risk reflecting the growing exposure to credit risk in the bank’s loan portfolio, there is potential for higher provisions for non-performing loans (NPLs).

This could reduce profitability in the short term and affect the anticipated returns from the rights issue if the bank’s expanded lending leads to higher defaults or impairments.

That said, shareholders who participate stand to gain from both immediate value opportunities and the bank’s strengthened market position, assuming that the bank can effectively manage credit risk and maintain its profitability trajectory.