Culled—Proshare

May 6, 2020

by FBNQuest Research  

7% reduction to our price target

FCMB Group’s (FCMB) Q1 2020 results came in ahead of our forecasts across all major headline items. The bank’s PBT beat our forecast by c.30% because of positive surprises on both revenue lines. However, we have made modest upward revisions of c.6% on average to our 2020-22E EPS forecasts. Similar to its position on its Q4 2019 conference call, management failed to provide specific guidance on key metrics on its Q1 2020 call.

However, it recognised that there are downside pressures to near-term earnings by way of higher levels of credit loss provisioning and a slowdown in recoveries due to deteriorating macroeconomic conditions. The bank plans to restructure about 50% of its loan book, mainly in the oil and gas, power, SME and consumer sectors. Regardless, following the subdued environment for crude oil prices, plans are underway to make additional collective impairment for its oil and gas upstream loan book. We understand that c.30% of exposures in that particular sector is unhedged. Consequently, the modest upward revisions to our 2020E earnings forecast is on the back of a 20bp increase in our cost-of-risk assumption to 2.2%.

Despite the upgrade to our earnings forecasts, our new price target of N2.85 is c. -7% lower because of a 150bpincrease to the equity risk premium driving our DDM valuation to 7.5%. Having shed -8.1% ytd (vs. -11.3% NSE ASI), FCMB shares now imply a potential upside of c. 67.7% to our new price target. Despite the sizable upside potential implied by our price target, we retain our Neutral rating on the stock because of the near term headwinds ahead.

Q1 PBT up by strong double-digits y/y

FCMB’s pre-provision profits grew by 20% y/y, supported by solid growth of 24% y/y and 11% y/y in funding income and non-interest income respectively. The growth in funding income was underpinned by a 20bp y/y expansion in the net interest margin to 7.8% and loan growth of 7% q/q. Non-interest income growth was primarily supported by a 195% y/y increase in fx revaluation gains. In contrast, net fees and commissions grew by a mere 2% y/y, due to the reduction of transaction fees by the CBN. 

Thanks to the solid growth in pre-provision profits, PBT grew by 27% y/y. PAT growth decelerated to 7.0% y/y because of an 88% y/y reduction in other comprehensive income. Sequentially, PBT and PAT declined by -26% and -62% q/q respectively because of a spike (+65% y/y) in opex.