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 GTB, Zenith and Stanbic.
Key positives
- 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).
- 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%.
- Cost/income ratio improved by 1.5ppts yoy on the back of lower operating expenses.
- Lower tax charge as no excess dividend charge was incurred in 2019.
Key negatives
- Revenues were down 1% yoy as non-core revenues declined by 20% yoy, driven by lower dividend income.
- FCMB recorded a 0.65ppts decline in margins, which we think is representative of the general downtrend in asset yields in the market.
- 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.
| NGNbn | FY 19 | FY 18 | yoy | 9M 19 | qoq |
|---|---|---|---|---|---|
| Net interest income | 75,976 | 72573 | 5% | 56,231 | 35% |
| Non-interest income | 20,722 | 21,607 | -4% | 15,308 | 35% |
| Other operating income | 14,080 | 17,600 | -20% | 12,310 | 14% |
| Total operating income | 110,779 | 111,780 | -1% | 83,849 | 32% |
| Operating expenses | 76,901 | 79,224 | -3% | 63,194 | 22% |
| Pre-provision income | 33,878 | 32,556 | 4% | 20,655 | 64% |
| Net impairment charge | 13,748 | 14,113 | -3% | 7,852 | 75% |
| Net attributable profit | 17,260 | 14,886 | 16% | 10,791 | 60% |
| Net loans | 715,881 | 633,035 | 13% | 638,065 | 12% |
| Deposits | 943,086 | 821,747 | 15% | 863,440 | 9% |
| NII margin | 4.90% | 5.55% | 4.00% | ||
| Cost/income ratio | 69.4% | 70.9% | 75.4% | ||
| ROE | 9.00% | 8.00% | 5.89% | ||
| NPL ratio | 3.67% | 5.90% | 5.10% | ||
| NPL coverage | 139% | 120% | 144% | ||
| Cost of risk | 1.82% | 1.33% | 1.21% |