Earnings Report /

FCMB Group: FY 20 earnings grow on balance sheet expansion and improved cost efficiency

  • Cost efficiency continued to improve, but could come under pressure in FY 21 as cost benefits from pandemic wane

  • AIICO acquisition conclusion now expected in Q2 21. Management expects it to add about 20% to profit from wealth segment

  • We maintain our 12M TP of NGN3.6, and upgrade to Buy on rapid digital adoption and efforts to diversify business lines

Tellimer Research
7 April 2021
Published byTellimer Research

FCMB’s FY 20 net attributable profit grew 13% yoy to NGN19bn, outperforming both our estimate and Bloomberg consensus by 6%. The group declared a final dividend of NGN0.15/share, translating to a modest payout of 15% – similar to the preceding year and in line with our expectation, as the group continues to retain profits from its banking subsidiary to shore up its capital position.

In terms of profitability, the group’s metrics improved slightly as ROE grew 0.1ppts to 9.1%, although ROA remained flat at 1.1%. Its Commercial and Retail banking segment (ROE: 14.7%) and Wealth management segment (ROE: 29.9%) remained the core profit drivers, while Corporate and Investment banking was loss-making due to high impairment losses and difficulties associated with some legacy loan assets (ROE: -2.8%).

FCMB's ROE vs coverage banks

Analysis of the group’s underlying performance showed that the low yield environment paved the way for a moderation in funding costs, while interest income grew on the back of an expanded balance sheet – both contributing to a better turnout of net interest income.

Management also attributed part of the growth to increased exposure to retail loans, as the average yield on its retail portfolio is around 20%. Asset quality was positive during the period, as the NPL ratio improved 0.4ppts yoy to 3.3% and the proportion of stage 2 loans decreased to 21.1% from 22.5% in FY 19. However, the group’s net cost of risk ticked up to 1.7% (FY 19: 1.2%), mainly due to the dim macroeconomic environment and stress on the operations of a particular client in the downstream oil and gas sector.  

Our unchanged 12-month target price suggests 25% upside, upgrade to Buy

We maintain our 12-month TP on FCMB at NGN3.6. But with an expected total return of 25% at the current share price we upgrade our recommendation to Buy. Our positive outlook on the group includes its efforts to further diversify business lines and grow its highly profitable Wealth management segment – with potential value accretion from the acquisition of AIICO Pension Managers (completion now expected in Q2 20).

The group’s digitisation drive is also positive for further improvement in cost efficiency and further penetration into the retail banking space. Furthermore, its improved CRR position (32.1% vs 54.6% in 9M 20) following refunds by the CBN, is positive for the group’s interest-earning abilities.

However, we note that while the company's capital (17.7%) and liquidity (34.2%) ratios are improving, they remain below our coverage average of 21% and 38%. In order to boost risk asset creation, FCMB is expected to continue to retain most of its profits from the banking subsidiary and source tier 2 capital, however at the expense of low payout levels to shareholders. FCMB trades at 3.0x FY 20 PE and 0.3x tangible PB, a discount to its Nigerians peers at 4.8 FY 20 PE and 0.8 tangible PB.

Key positives

  • Net interest income grew 19% yoy, on the back of 15% growth in the group’s gross loan book and 66% in investment securities. The group’s reported NIM increased to 8.1% from 7.1% in FY 19.

  • Non-interest income (up 9% yoy) was boosted by triple-digit growth in FX revaluation gains. The group benefited from its US$120mn long exposure to USD, owing to the multiple devaluation of the naira in FY 20. However, net fee income declined 6% yoy, dragged by the woeful performance of e-banking (despite 73% growth in transaction volumes on Mobile banking and USSD channels) – which management attributed to the downward revision in bank charges by the CBN in 2020.

  • The group’s assets under management (AUM) grew 23% yoy, mostly from its collective investment schemes and wealth management line, compared to its pension business. Management noted that 55% of the increase came from new net contributions, while 45% came from investment returns on the assets.

  • Cost to income decreased for the second consecutive year, dropping 3.8ppts yoy to 66%, However, operating expenses increased 10%, due to the larger expenses recorded for the provision of litigation, as well as donation and sponsorship expenses.

  • The group’s CAR position improved from 17.2% to 17.7%, while liquidity improved from 32.9% to 34.2%. The growth in CAR was supported by the capitalisation of the FY 20 earnings of the banking subsidiary.

  • As a result of the effects of CBN’s CRR refunds via special bills, FCMB’s mandatory cash reserves dropped 34% qoq. As a result, the effective cash reserve ratio (CRR) improved significantly to 32.1% from 54.6% in 9M 20.

  • NPL ratio improved 0.4ppts yoy (flat qoq) to 3.3%. Provision coverage also remained robust at 163%, vs 139% in 9M 20.

  • Tax charges dropped 18% yoy, as the group paid lower minimum taxes during the period.

Key negatives

  • FCMB’s net loan impairment charge (accounting for recoveries) increased 58% yoy to NGN14bn. As a result, net cost of risk settled at 1.7% (FY 19: 1.2%).

  • The group’s gross loans/customer deposits dropped 1.6ppts qoq to 69%, as the 10% qoq growth in deposits outweighed the 6% qoq growth in loans.

FCMB FY 20 results summary

Other takeaways from management’s call

Digitisation drive

For the period, the bank recorded a 43% yoy growth (66% in FY 19) in its number of digital customers, mainly due to increased usage on its mobile banking channel. Digital lending was also active during the period, as total digital loans from the bank came in at NGN89bn, representing 30% of total retail loan sales and 86% of retail loan volumes. In FY 21, boosting digitalisation remains a key focus for management, to increase non-interest income lines via transaction fees and boost retail lending via its digital platforms. The group’s subsidiary, Credit Direct Limited (focused on unsecured micro-lending) is also expected to go fully digital in 2022.

Gross loan book

Given the multiple currency adjustments in the year, management noted that 30% of the increase in gross loans came from revaluation, particularly on the Oil and gas portfolio. In terms of loan mix, the group significantly increased exposure to General commerce (35% yoy), Individuals (29%) Manufacturing (22%) and Education (40%), while cutting exposure to Government (-74% yoy), ICT (-27%) and Transportation (-16%). In terms of asset quality across the group’s loan segment, consumer credit from Credit Direct Limited (makes 18% of total individual loans) recorded the largest increase in NPL ratio to 12.9%, as well as the downstream oil and gas sector to 9.3%. Management noted that the yoy growth in downstream NPLs came from a client affected by delays of committed receivables from the Federal Government of Nigeria (FGN), and they have an effective coverage of 83% on the downstream sector. Notably, in line with CBN’s policy cushions to sectors impacted by the pandemic, c28.4% of FCMB’s total loan book was restructured.

FCMB's gross loan book breakdown

FCMB's NPL ratio by sectors

AUM growth

Management expects assets under management to grow 19% yoy (compared to 23% in FY 20) to NGN588bn in FY 21, excluding the potential impact of the AIICO acquisition. The acquisition is expected to be completed in Q2 21, with final approval from the National Pension Commission outstanding, while approvals from the CBN and two other essential regulatory authorities have been obtained. In line with our thoughts for Stanbic IBTC's pension business, the opening of the pension transfer window, which allows retirement savings account holders to transfer their holdings to a different pension operator at least once a year, will increase competition for FCMB going forward and put potential pressure on market share.