August 6, 2020/United Capital Report
Earlier, FCMB plc (FCMB) released its H1-2020 results, showing a 9.3% growth in Gross Earnings (GE) to N98.2bn. The growth in top-line was driven by interest income which grew by 8.2% y/y in H1-2020 and foreign exchange revaluation gains of about N3.3bn amid loan growth and currency devaluation. Given the impressive earnings and a 3.0% decline in interest expense, PBT and PAT grew by 25.6% and 28.8% respectively. We review the H1-2020 earnings below and highlight our expectations for FY-2020 below.
Resilient core earnings
Despite the expectation of depressed Q2-2020 earnings amid COVID-19 uncertainties, FCMB’ Gross Earnings rose 4.1% y/y in Q2-2020, spurring the overall growth in H1-2020 to 9.3 %y/y. Specifically, the performance was buoyed by respective growth in Interest income and Non-interest income. Although the growth in Interest income was muted in Q2-2020, up 1.8% y/y, strong growth in Q1-2020 drove the overall Interest income growth in H1-2020 to 8.2% y/y. This was on the back of 11.0% YTD growth in Loans and Advances as well as 25% YTD growth in Investment Securities. Also, Interest expense declined by 3.0% y/y in H1-2020, driven by lower cost of funds amid the low interest rate environment that characterized the review period. Thus, net interest income grew by 17.4%y/y.
For Non-interest income, naira devaluation and depreciation induced a 240%y/y increase in foreign exchange gains to N3.3bn in H1-2020 and offsetting the underwhelming performance of the Fees and Commissions income, which declined by 4.1% in H1-2020 on the back of regulatory reduction in charges. In terms of efficiency, growth in Current and Savings deposit, reduction in MPR and lower yield environment aided the moderation in cost of funds to while cost savings in Q2-2020 due to lockdown moderated cost to income ratio slightly from 73.5% to 70.1%. In all, the growth in Interest income and FX gains buoyed the bottom line numbers as PBT and PAT rose 25.6% and 28.8% y/y to N11.1bn and N9.7bn, respectively. As such ROE improved to 9.4%, previously 7.8%
Asset quality: No cause for alarm
Given the primary and secondary negative impact of the COVID-19 pandemic on the Nigerian economy, we had expected FCMB’s asset quality to significantly deteriorate, especially because 17% of the bank’s loan book was exposed to the highly affected Upstream Oil and Gas sector. Accordingly, this was reflected in the growth in impairment losses which jumped 40.8%y/y to N7.7bn in H1-2020. However, FCMB’s Non-Performing Loans ratio remained flat q/q at 3.5% (down 0.8% from H1-2019) and below the regulatory minimum of 5% amid loan growth and partial write off of the 9-mobile loan, which made up about 14.8% of the NPLs in H2-2019.
Enticing long term prospects: Hold
We expect challenges to persist amid the tough regulatory and macroeconomic environment. In line with the challenging macroeconomic environment, we adjust our risk premium slightly. Accordingly, we revise our target price to N1.82/share, a 4.2% downside from the current price of N1.90.
Although, we believe the resilience in H1-2020 has shown that FCMB is more than well positioned to weather the storm and emerge stronger post-COVID. For asset quality, the bank plans to restructure about 40% of its loan book and provide tenor extension to debtors in the oil and gas, manufacturing, retail, real estate, and power sector.
In addition, the planned acquisition of AIICO pensions by FCMB pensions provides a significant opportunity for inorganic AUM growth in the mid-term and cost synergy advantage in the long term. Again, the HoldCo structure and efforts to strengthen other business units (Investment management) enhances the prospects of a long-term value delivery. We expect FY-2020 ROE to print about 11%and we estimate dividend yield at 7.4% at current price.
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