Culled—Proshare

May 1, 2018/Vetiva Research 

• Top and bottom lines track estimates, PAT up 64% y/y

• IFRS 9 implementation results in ₦15 billion one-time equity charge

• TP revised marginally higher to ₦4.66

Low Q1’17 base flatters earnings growth, up 64% y/y

FCMB released its Q1’18 earnings, with top line and bottom line performances coming in largely in line with Vetiva’s estimates. Gross Earnings and PAT rose by 10% and 64% y/y to ₦42.2 billion and ₦2.6 billion respectively. We however note that results came in weaker q/q with top and bottom line down 17% and 34% respectively. Contributing to y/y top line growth, Interest Income came in line with our expectation – up 9% to ₦32.6 billion despite a notable 10% drop in Loan Book to ₦595.8 billion.

Also, though lagging our estimate by 11%, Non-Interest Income grew a modest 6% y/y to ₦8.1 billion as one-off income from PPE disposal and previously written off receivables normalized. With growth in Interest Expense contained at 4% despite the sizeable 14% y/y and 8% q/q rise in Customer Deposits to ₦747.7 billion, Net Interest Income came in 14% higher y/y at ₦17.8 billion – 1% better than our ₦17.6 billion estimate.

In line with IFRS 9 provisions, a one-off charge of ₦15.2 billion was taken against the retained earnings of the bank at the start of the quarter. However, deviating from the trend seen in other banks, loan loss provision remained relatively flat y/y at ₦4.9 billion, though 9% lower than Vetiva’s estimate. Following this, Operating Income was up 15% y/y – albeit in line with our estimate at ₦21.0 billion. Furthermore, with Operating Expenses coming in 3% lower than we had anticipated at ₦17.7 billion (up 9% q/q), PAT advanced 64% to ₦2.6 billion – in line with our estimate.

TP revised marginally higher to ₦4.66 (Previous: ₦4.49)

We highlight that earnings came largely in line with our estimates and as such, we maintain our forecasts across most line items. We note the 10% moderation in loan portfolio following the implementation of IFRS 9. Consequently, we revise our loan growth forecast to -2% for FY’18 (Previous: 0%).

With yield on assets coming in slightly higher than we had expected, our Interest Income estimate is little changed at ₦133 billion. However, we revise our Interest Expense forecast marginally lower to ₦60.7 billion (Previous: ₦61.0 billion) reflecting lower than expected Cost of Fund despite an upward revision to deposit growth.

Also following better than expected provisioning in Q1’18, we reduce our loan loss provision estimate for FY’18 marginally to ₦19.5 billion (Previous: ₦21.4 billion) – translating to a Cost of Risk of 3.0%. Consequently, we estimate an Operating Income of ₦85.5 billion for FY’18. Furthermore, we cut our Operating Expenses estimate to ₦68.3 billion (Previous: ₦70.0 billion) – translating to a 200bps moderation in Cost to Income Ratio to 65%.

We maintain a dividend of ₦0.10 per share for FY’18 (payout ratio of 14%). We revise our target price marginally higher to ₦4.66 (Previous: ₦4.49). We remain optimistic about the medium to long term outlook on FCMB and believe the stock remains largely undervalued. FCMB trades at an FY’18 P/E and P/B of 3.5x and 0.3x vs our coverage banks’ averages of 5.9x and 0.9x respectively.