FCMB held its earnings call on Friday, following the release of slightly weak FY 19 results. Compared to other Tier 2 Nigerian banks, we think FCMB’s FY 19 performance was better, given the bank’s improvement in cost/income ratio and asset quality.
Five key takeaways
- Management identifies areas of growth and loss due to Covid-19. The pandemic is an opportunity to accelerate the adoption of digital financial services as well to moderate operating expenses. However, it is still in the early days and management should provide more clarity during the Q1 20 results call. Management also noted that the bank recorded a surge in corporate lending requests ytd and expects this trend to continue well into Q2 20 as corporates seek working capital to restructure or cushion the effect of the currency devaluation on their operations.
- FCMB reported a net long FX position as c48% of loans are in foreign currency (FCY) and deposits at c20%. Management also stated that the recent currency devaluation resulted in loan book growth, which would be explained further in the Q1 20 presentation. However, as c10-15% of its loan book is vulnerable to exchange rate fluctuations, management remains cautious and said restructuring discussions are underway.
- Asset quality risks exist but are subdued as restructuring of oil sector loans (for c50% of upstream and midstream oil loans) and CBN intervention loans (which account for c10% of loan book) via tenure elongations and other measure should keep NPL ratio within a 100bps band from 3.7% at end-FY 19. The bank expects cost of risk to increase in 2020 (0.9% in FY 19) driven by higher impairment charges on account of the twin challenges of the coronavirus and the sustained drop in oil prices. The bank has performed a stress test of various scenarios such as 20%/40%/60% devaluation on currency with oil prices as low as US$20/bbl. Its worst-case scenario of a currency devaluation of 60% and oil priced at US$20 could result in NPL ratio doubling to 8% and CAR coming down about 150bps, but still above the 15% minimum for the next 9-12months.
- Change in earnings presentation. Going forward, FCMB will present its group performance across three major business segment: commercial and retail banking (comprising all banking business except corporate banking), corporate and investment banking (comprising FCMB ltd corporate banking, FCMB capital markets ltd and CSL stockbrokers) and investment management. The bank also expects to see increased contribution to PBT from the non-banking segments.
- Outlook. Management reiterated three major plans for operations in 2020. First, the bank maintains it loan growth estimate of 14% for FY 20, but shifts its focus to corporates seeking restructuring and working capital loans on account of the Covid-19 disruptions. Second, the diversification of non-banking activities, especially investment management where AUM is expected to grow by 20% in FY 20 as customers search for better yielding investment instruments. Third, continued growth of digital financial services especially payments and lending.
We have a Hold recommendation on FCMB, with a TP of NGN1.90, and implied ETR of 27%. The stock price has declined significantly ytd due to underlying market weakness, hence its depressed valuation (FY 19f P/B of 0.2x vs Nigeria and frontier peers’ 0.3x and 0.7x average, respectively). However, as FCMB’s operating efficiency remains weak and capital adequacy ratios are not as impressive as its peers, we reiterate our Hold. In Nigeria, we prefer banks like GTB, Zenith and Stanbic.