Earnings Report /
Nigeria

FCMB Group: FY19 core revenue underwhelms, one-offs support earnings, Hold

  • Better-than-expected balance sheet growth as capital ratios improve

  • Asset quality continues to improve as NPL ratio down to 3.7%

  • Managements expect net interest margin to continue to decline in 2020 due to challenging macro environment

Nkemdilim Nwadialor
Nkemdilim Nwadialor

Equity Research Analyst, Financials

Follow
Tellimer Research
1 April 2020
Published byTellimer Research

FCMB Group's FY 19 net attributable profit rose 16% yoy to NGN17.3bn, well ahead of our NGN12.5bn forecast, largely due to: 1) lower-than-expected operating expenses due to a NGN6.5bn reversal on litigation provisions; and 2) a lower effective tax rate. A final dividend of NGN0.14, was proposed, which at the current market price represents a yield of 9.3%.

We have a Hold rating, with a TP of NGN1.90, which implies an ETR of 27%. The underlying market weakness has contributed to the 21% price decline for the stock YTD, hence its depressed valuation (FY19f P/B of 0.2x vs Nigeria and frontier peers’ 0.5x and 0.9x average respectively). However, as FCMB’s operating efficiency remains weak and capital adequacy ratios are still unimpressive, we maintain our Hold. We prefer banks like GTBZenith and Stanbic.

Key positives

  1. Improved capital ratios (CAR at 17% in FY 19 vs regulatory minimum of 15%) resulted in strong balance sheet growth as loans increased by 12% qoq (a general trend with other Nigerian banks as they strive to meet the CBN’s minimum LDR of 65%, FCMB stands at 59% in FY 19).
  2. A 16% improvement in Stage 3 loans, especially service and agriculture loans, resulting in a 1.4ppts reduction in the NPL ratio over the quarter to 3.7%.
  3. Cost/income ratio improved by 1.5ppts yoy on the back of lower operating expenses. 
  4. Lower tax charge as no excess dividend charge was incurred in 2019.

Key negatives

  1. Revenues were down 1% yoy as non-core revenues declined by 20% yoy, driven by lower dividend income.
  2. FCMB recorded a 0.65ppts decline in margins, which we think is representative of the general downtrend in asset yields in the market. 
  3. Cost of risk rose 0.61ppts over the quarter to 1.8% as no impairment reversals were recorded in Q4.

Outlook

Management expects 2020 to be quite tumultuous on account of the twin challenges of the coronavirus pandemic and lower oil prices. Also, greater focus will be placed on the adoption of digital financial services by customers.

Table 1: FY 19 results summary
NGNbnFY 19FY 18yoy9M 19qoq
Net interest income75,976725735%56,23135%
Non-interest income20,72221,607-4%15,30835%
Other operating income14,08017,600-20%12,31014%
Total operating income110,779111,780-1%83,84932%
Operating expenses76,90179,224-3%63,19422%
Pre-provision income33,87832,5564%20,65564%
Net impairment charge13,74814,113-3%7,85275%
Net attributable profit17,26014,88616%10,79160%
Net loans715,881633,03513%638,06512%
Deposits943,086821,74715%863,4409%
NII margin4.90%5.55%
4.00%
Cost/income ratio69.4%70.9%
75.4%
ROE9.00%8.00%
5.89%
NPL ratio3.67%5.90%
5.10%
NPL coverage139%120%
144%
Cost of risk1.82%1.33%
1.21%
Source: Company accounts