29 August 2018 : FCMB half-year result saw earnings jump 90% YoY to N0.29/share on the back of moderation in funding cost (-44 bps YoY to 6.0%), strong Non-Interest-Revenue (+28% YoY) and a substantial decline in loan- loss provision (-27% YoY to N7.3 billion). However, some key line items came in as a surprise. To be specific, loan growth (-9% YTD) was below analyst's expectation of 0.7% YoY growth. Also, operating expense (OPEX) ran ahead of their estimates (+3.6% deviation) due to higher AMCON charge (+75% YoY) while NIR came in lower than expected (-4.4% deviation).

Following engagement with management, analysts made some changes to their estimate for 2018. To be specific, analysts now model a 6% decline in loan book (previously +0.7% YoY) following current run rate of a 9% decline. Furthermore, analysts revise the bank’s Non-Performing Loan (NPL) ratio higher to 5.6%1 (H1 18: 5.7%) due to higher NPL exposure to Oil & Gas downstream. Analysts also adjust their forecast for NIR slightly lower to N34.6 billion (previously N35.1 billion). Lastly, analysts revise their operating expenses slightly higher by 2.8% to reflect higher AMCON charge. That said, key drivers for 2018 earnings remain strong NIR, lower funding cost and loan-loss provision. Net impact of their adjustment translates to an EPS of N0.55 (previously N0.87) in FY 2018 with their FVE revised lower to N2.34 (previously N3.38).

Nonetheless, analysts maintain their BUY rating on the stock. FCMB trades at a FY 18E P/B of 0.18x, at a discount to Tier 2 average of 0.20x.

At current price, their expected dividend of N0.10 over FY 18E translates to a dividend yield of 5.3%. 

Key take-away from Conference Call

Non-Performing Loan. Higher NPL in Oil & Gas downstream in H1 18 reflected delayed payment by the FG to oil marketers. However, management hinted there is a high prospect of recovery given that the Senate has approved payment.

Trading Income. Jump in trading income over the quarter was because of management’s deliberate decision to increase government assets. To buttress, significant pay downs in loans that was recorded over H1 18 was held into trading assets. Management will be looking out for opportunities in the market to trade and further increase trading income.

Regulatory charges. Impact of CRR and AMCON charges costs about N20 billion every year on earnings.

Capital Raise. There is no plan for Tier 1 capital raise, but the bank might consider a tier 2 capital raise depending on market condition. In short, management hinted at them looking for opportunities to get efficiently priced debt.

Revision to loan book on higher repayment and cautious stance

Analysts maintain their positive stance on deposit growth over 2018. To be specific, analysts expect deposit growth of 7% YoY to N741 billion (H1 18: +4.6% YTD). On loans, management pointed to significant pay downs in the Oil & Gas and Real Estate sectors as the drivers for the contraction in loan book which they expect will continue into Q3 18. In Q4 18, management guides to a pick-up in loan growth which will be directed largely to the consumer sector. However, analysts do not expect any possible increase to offset the decline recorded in H1 18 (-9.8% YTD). Analysts therefore model a 6% decline in loan book over FY 2018 (H1 18: -9.8% YTD). Consequently, loan-to-deposit ratio should print at 82.4% over FY 2018 (H1 18: 81.2%, FY 17: 94.2%). With management’s cautious approach to risk creation, this should cascade into higher investment securities over 2018 (+12% YoY to N240.5 billion).

Lower funding cost to moderate impact of lower yields on NIMs

Analysts expect the impact of lower funding cost over 2018 to moderate the decline in Net Interest Margin (- 14 bps YoY to 6.3%). Importantly, analysts believe interest expense on borrowings from bank should remain tepid over the rest of the year given the improved liquidity position2 of the bank. That said, asset yield is expected to moderate to 11.8% over FY 18 (H1 18: 11.7%, FY 17: 12.2%) on the back of the relatively lower yield environment.

Fee and Trading Income to boost NIR

For non-interest revenue (NIR), analysts see support from both fee and trading income leg. On the former, analysts see sizable gains from digital banking and its asset management business. For emphasis, the bank has come up with new initiatives to drive income, one of which is its digital lending platform it launched in H1 18 which largely drove fee income over the period. Analysts expect this momentum to be sustained over the rest of the year. Elsewhere, analysts expect income from the asset management business to contribute circa 14% to PBT in 2018 (2017: 2%), coming largely from its stake in Legacy Pension. On trading income, management’s drive to increase trading assets should provide support for treasury-bills trading income. On balance, NIR should expand 8% YoY to N34.6 billion.

Lower impairment charge to support earnings

As mentioned earlier, analysts revise their forecast of NPL ratio higher to 5.6% (FY 17: 4.9%, FY 19: 5.0%) due to higher NPL exposure to the Oil & Gas downstream sector and contraction in loan book. The higher NPL exposure to the Oil & Gas downstream sector reflects delayed payment to oil marketers by the FG. Although, the Senate has approved this payment, analysts choose to be conservative due to the bureaucratic nature of disbursement of funds by the FG. Furthermore, analysts revise Cost of Risk (CoR) slightly higher to 2.5%(FY17:3.5%,H118:2.5%)from2.3%.Lastly, factoring our expectation of about N5 billion in loan recoveries in 2018, analysts expect a 33% YoY decline in loan loss provision to N15.3 billion.

Elsewhere, analysts project additional 2.8% increase in operating expenses to N74.2 billion (FY 17: N68.7 billion, FY 19: N78.1 billion) reflecting higher AMCON charges with Cost-Income-Ratio printing at 72.2% (FY 17: 67.0%).

Net impact of their overall adjustment translates to a PBT of N13.5 billion over FY 18E. Thus, analysts estimate EPS of N0.55 (+15% YoY). Looking beyond 2018, major game changer to FCMB’s earnings will stem from lower CRR and possible conclusion of AMCON charge after the 10-year term limit which is to end in 2020. Key risks to analyst's valuation include liquidity pressure from higher CRR, and NPL ratio climbing higher. In the interim, analysts see ROE treading on single digits (FY 17: 5.7%, FY 18E: 5.5%, FY 19E: 7.7%, FY 20E: 8.4%). FCMB trades at a FY 18E P/B of 0.18x, which is at a discount to Tier 2 peers of 0.20x. At current price, analyst's expected dividend of N0.10 over FY 18E translates to a dividend yield of 5.3%.

Reporting for EasyKobo on Wednesday ,29 August 2018 in Lagos, Nigeria

Source: Emmanuel Adeleke from ARM Securities Limited

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