Equity Analysis /

FCMB Group: Q1 19 earnings improve sharply as expected

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Rahul Shah
    Faith Mwangi
    Tellimer Research
    6 May 2019
    Published by

    Q1 19 net income rose 41% yoy to NGN3.6bn, in line with our NGN3.5bn forecast. The performance was driven by: 1) a 63% yoy drop in the net impairment charge, in line with the sector trend; 2) a 5% yoy increase in net interest income, partly reflecting a sustained decline in the cost of funds; and 3) a lower effective tax rate of 16% vs 21% in Q1 18, reflecting higher income from tax-exempt treasury securities. On the downside: 1) non-interest revenues fell by 4% yoy; 2) there were increases across the key operating expense lines; and 3) gross loan volumes fell relative to end-FY18

    Maintain our Hold rating with an unchanged TP of NGN1.90 and 5% ETR. We are neutral on these results, which reflect the bank’s weak operating cost efficiency that continues to weigh on profitability. Within our Nigeria banks coverage, we favor GTB and Zenith in Tier 1 and Stanbic in Tier 2. FCMB trades on FY19f P/B of 0.2x vs frontier peers at 1.5x. 

    Falling cost of funds contributed to net interest income growth. There was a 0.5ppts yoy decline in the cost of funds, partly attributable to a 2ppts yoy increase in the CASA ratio to 72%. This kept the NIM decline at just 0.6ppts yoy, as asset yields weakened. On NIR, the decline was due to significant gains on disposal of investment securities booked in Q1 18 and a marked decline in FX gains, which offset improvements in net fee/commission and trading income. 

    Cost/income ratio of 75% was well above the 69% level in Q1 18 and the 56% average for our coverage universe. There was a 12% yoy increase in operating expenses during the quarter, resulting from higher personnel and regulatory expenses and other general business costs. This offset a weaker 2% yoy increase in the top line. 

    Gross loans declined qoq, as did NPLs. Gross loan volumes fell by 4% qoq, which management attributed to loan repayments in the commerce, downstream and agriculture sectors. Write-offs and recoveries drove the 28% qoq decline in the NPLs stock as the NPL ratio moderated to 4.3% (down 1.5ppts qoq), while the NPLs provisions coverage improved to 146% (up 25ppts qoq). 

    Deposits were flat relative to end-FY 18, as a decline in term deposits was offset by current and savings accounts deposit growth. The loan-to-deposit ratio consequently declined to 74% from 77% at the end of FY 18.