Culled—Proshare
August 2, 2019
by FBNQuest Research
13% avg. cut to our 2019-20E EPS forecasts
We maintain our Neutral rating on FCMB, while lowering our price target by 11% to N2.47. Our new price target offers a potential upside of 51% from current levels. The reduction to our price target is underpinned by average cuts of c.13% to our 2019-20E EPS forecasts. Relative to our forecast, FCMB’s Q2 2019 PBT surprised negatively, largely because of a sizable y/y decline in non-interest income – arising from substantial weakness in trading income (particularly fx).
The trends on the balance sheet were also not encouraging, with loan growth of 0.4% q/q (-2.4% ytd) tracking well behind the mid-point of management’s 5-10% growth guidance. Consequently, we have cut our 2019E loan growth forecast by 200bps to 5%, and by extension our funding income forecast by 7%.
Following management’s subdued outlook on non-interest income growth, we have also cut our 2019E non-interest income growth forecast by 5%. These cuts underpin the downward revisions to our 2019-20E EPS forecasts. Despite a spike in loan loss impairments in Q2, management sees cost-of-risk remaining within guidance of 2.0% (vs our 1.8% forecast). On the back of these revisions, we forecast 2019E PBT of N16.9bn, down 8% y/y.
Although FCMB’s shares are trading on a 2019E P/B multiple of 0.2x, similar to Fidelity Bank, its 2020E ROAE of 6.8% trails our 10.1% estimate for Fidelity Bank and is the lowest within our coverage. Our forecast dividend yield of 9.0% for the bank is also not compelling relative to Fidelity’s forecast yield of 14.3% and the median yield of 10.7% within our coverage.
Q2 PAT up 56% y/y thanks to a 497bp y/y decline in inc. tax rate
FCMB’s Q2 2019 PAT was up strongly by 56% y/y, thanks largely to a -497bps y/y reduction in the effective tax rate to 13.5%. Further up the P&L, PBT also advanced by 17% y/y. The double-digit PBT growth y/y was underpinned by a 14% y/y growth in funding income, which completely offset a -10% y/y decline in non-interest income and a 30% y/y spike in loan loss provisions. Sequentially, PBT grew 5% q/q thanks again to an 8% q/q increase in funding income.
However, PAT was 16% lower q/q, mainly because of a negative result of –N96m in other comprehensive income (OCI) compared with +N893m in the preceding quarter. Relative to our forecasts, PBT and PAT missed by significant margins mainly because of negative surprises in other income and loan loss provisions.
