24 April 2019 : Analysts remain optimistic about FCMB in the coming year as the bank continues to leverage on its diversified income base. Analysts expect management’s focus on increasing its digital footprint, ramping up customer acquisition and leveraging group cross-sell capabilities to drive Earnings growth. With a Target Price of N2.87, FCMB trades at a discount to peers - valued at 2.5x 2018 P/E (peer average: 6.0x) and 0.2x 2018 P/E (peer average: 0.5x). 

Enhancing the diversification strategy 

Despite the flattish growth in Interest Income observed across analyst's coverage banks (0.76% on average) and the industry, management’s diversification strategy yielded positive results, with signs for further growth this year. Profitability growth across various non-commercial banking segments (investment banking, asset management, trade finance and FI lending) was led by FCMB UK, which saw profit growth of 42% y/y to N515 million in FY’18. Management’s strategy of increased customer acquisition- with the bank adding c.800,000 new customers in 2018 and planning to add 1 million in FY’19- through further expansion of mobile and internet banking channels as well as a planned increase in agency banking- management plans to treble the number of FCMB agents to 1500- through partnerships and collaborations is expected to drive customer growth, while further leveraging of group synergies is expected to yield improved revenue per customer. 

Capital adequacy and the need for debt 

Capital adequacy and asset quality have been major talking points for the bank since 2015 when it was first announced that the bank was to seek Tier I and II capital. However, high bond yields put those plans on hold. Once again, the bank has announced plans to raise Tier II debt and retain a higher proportion of profits this year in order to boost its balance sheet. The need for capital has become more prescient post IFRS 9 adoption, as the accounting standard weakened CAR to 15.9%, slightly above regulatory benchmark of 15% (FY’17: 16.9%). With the bank’s strategy of lower dividend payout (FY’18: 18.5%) and increased retained earnings, as well as the possible raising of Tier II capital, analysts foresee an improvement in capital adequacy in FY’19. However, the raising of subordinated debt would affect the Interest Expense line, thus weakening NIM. 

Outlook and valuation 

Overall, analyst's top-line forecast comes to N203 billion for FY’19, driven by the projected increase in both Interest and Non-Interest Income, with a forecast of 29% growth in Fees and Commission income. Furthermore, whilst analysts forecast a 20% y/y growth in deposits for FY’19, analyst's Interest Expense forecast is higher at N66 billion – due to expectation of increased interest paid on deposits, despite the bank’s focus on growing low-cost deposits. Also, analysts expect cost of capital to slightly increase in FY’19, due to the issuance of subordinated debt. Therefore, despite analyst's forecast of stronger PAT (N19.37 billion), analysts foresee constraints in dividend payout due to restrictions from the CBN on dividend payuot for banks with NPLs above 5% (FY’18: 5.9%) and forecast a FY’19 dividend of N0.18 per share (FY’18: N0.10). As such, analysts place a 12-month target price of N2.87 on the stock, a BUY rating. 

Reporting for EasyKobo on Wednesday , 24 April 2019 in Lagos, Nigeria

Source: Joshua Odebisi from Vetiva Capital Management Limited