Culled—Proshare
November 25, 2016/FBNQuest Research
Event: FCMB Group reports Q3 2016 results
Implications: Negative market reaction likely
Positives: 168% y/y growth in non-interest income largely due to fx gains
Negatives: Pre-tax loss of -N2.1bn driven by a significant spike in loan loss provisions
Late yesterday, the NSE published FCMB Holdings’ (FCMB) Q3 2016 results which showed a pre-tax loss of –N2.1bn compared with PBT of N2.3bn in Q3 2015. Further down the P&L, the after-tax loss widened to -N2.6bn. The key driver behind the losses was a 6.8x y/y spike in loan loss provisions to –N21.0bn.
Although profit before provisions grew by a healthy 57% y/y, the expansion in loan impairment charges proved more significant. To put the magnitude of the impairments taken in Q3 into context, it is around 212% higher than the average quarterly provision run rate of N6.7bn for H1 2016.
Returning to pre-provision profits, the other income line which grew by 168% y/y to N18.8bn (on the back of fx gains) was the key driver. Although funding income also grew, its impact was modest. Sequentially, the pre-tax and after tax losses compare with PBT and PAT of N14.1bn and N16.6bn respectively in Q2 2016. The earnings also surprised negatively relative to our PBT and PAT forecasts of N8.6bn and N7.3bn.
Similar to the y/y trends, the wide variance between our PBT forecast and actual was due to the negative surprise in loan loss provisions which came in around 218% higher than what we were modelling. Above the provisions line, profit-before-provisions beat our forecast by 10% because of the positive surprise in other income.
The spike in impairments was primarily due to oil & gas exposures (particularly downstream) which already accounted for around 22.3% of non-performing loans (NPL’s) in Q2 2016. Since most of these loans are denominated in foreign currency, the prevailing exchange rate of c.N315 per US$ vs. around c.N200 previously most likely necessitated the marked increase in impairments.
State governments loans which account for around 25% of the bank’s loan book may also have contributed. The impairment charge for 9M 2016 implies a cost-of risk of 7.5%. As such, we expect it to be a major focal point for investors on the bank’s conference call later today.
Management had stated on its Q2 2016 conference call that it expects to restructure around 25% of its loan book, resulting in tenor extensions of between 1-2 years. We believe that restructurings and write-off of NPLs most likely explain the improvement in the NPL ratio to 3.4% (4.7% as at Q2 2016).
FCMB’s 9M 2016 PBT of N14.2bn tracks behind consensus 2016 PBT forecast of N24.5bn. As such, we expect to see marked downward revisions to consensus 2016 PBT forecast and a broad sell-off in the shares. The shares have shed -37.9% ytd, worse than the -11.0% return on the All Share Index.
We rate the shares Neutral. Our estimates are under review.
FCMB Group Q3 2016 results: actual vs. FBNQuest Research estimates (N millions)
