Culled—Proshare

November 28, 2016/FBNQuest Research

Neutral rating maintained despite 44% reduction to our PT

FCMB Group’s (FCMB) Q3 2016 results came in well behind our forecasts, largely because of a negative surprise in loan loss provisions. Although non-interest income grew strongly (due to fx gains of N17.0bn) and opex declined marginally, the provisions line was more meaningful.

Despite the jump in provisions, FCMB’s NPL ratio improved from 4.6% in Q2 to 3.4% in Q3 – this was purely down to a significant loan write-off of around. Given the scale of the provisions (up +82% y/y) and in line with management’s guidance, we have increased our cost-of-risk assumption to 7.0% from 4.0% previously.

As a result, we have reduced our 2016E PBT to N13.1bn from N27.9bn previously, and our ROAE forecast to 7.5% from 14.4%. These explain why our new price target of N1.1 is around -44% lower, close to where the shares are trading.

Year to date, FCMB shares have underperformed the index, shedding -37.9% ytd vs. a -11.6% return on the NSE ASI. We maintain our Neutral rating on the stock.

Pre-tax loss of –N2.1bn driven by spike in loan loss provisions

FCMB’s Q3 results showed a pre-tax loss of –N2.1bn compared with a pre-tax loss of -N7.0bn in Q3 2015. Further down the P&L, the after-tax loss widened to -N2.6bn. The key driver behind the losses was an 82% y/y spike in loan loss provisions to –N21.0bn.

Although profit before provisions grew by a healthy 66% 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 165% y/y to N18.8bn (on the back of fx gains) was the key driver. Although funding income also grew, its growth was more subdued at 17% y/y.

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.