Earnings Report /
Nigeria

FCMB Group: Q1 20 – Core revenues supported by strong asset growth and lower funding costs

  • Group deposits now in excess of NGN1tn; lower funding costs as the bank continues to grow low-cost deposits

  • Higher impairment charges due to devaluation impact on provisions for new loans

  • We have a Hold recommendation on FCMB (TP: NGN1.90) as operating efficiency remains weak

Nkemdilim Nwadialor
Nkemdilim Nwadialor

Equity Research Analyst, Financials

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Tellimer Research
30 April 2020
Published byTellimer Research

FCMB reported net profit of NGN4.7bn (up 31% yoy) in Q1 20 attributable to higher net interest income (up 24% yoy), which offset lower trading income, higher operating expenses (up 14% yoy), and higher impairment charge (up 99% yoy). 

We reiterate our Hold recommendation with a TP of NGN1.90 (ETR 15%). FCMB trades at a 2020f PB of 0.2x below its Nigerians peers at 0.4x and our frontier universe average at 0.8x. Due to FCMB’s weak operating efficiency and capital adequacy ratios within a 2ppts band of the regulatory minimum, we reiterate our Hold recommendation. Among Nigeria banks, we prefer GTBZenith and Stanbic.

Key positives

  1. Net interest income was up 24% on account of high volume growth in interest-earning assets and lower funding costs.
  2. Cost/income ratio was down 3.7ppts to 71% as higher core revenues outweighed a 14% increase in operating expenses. 
  3. NPL ratio improved by 0.2ppts and provisions coverage increased to 154%. 

Key negatives

  1. Trading income was down 11% yoy owing to a 72% decrease in FX income 
  2. Higher impairment charges (up 99% yoy), which according to management, was partially due to the impact of FX devaluation on impaired assets and provisions for newly classified loans.

Net interest income was up 24% yoy, owing to impressive growth in interest-bearing assets (loans were up 24% yoy while investment securities grew by 51% yoy) and a reduction in the cost of funds (down 0.7pppts yoy) as part of the bank's low-cost deposit strategy. As a result, net interest margin remained almost the same (down 0.01ppts yoy), but was up 0.5ppts when compared with Q4 19.

Cost/income ratio was down 3.7ppts to 71% as higher core revenues outweighed a 14% increase in operating expenses. The rise in operating expenses was driven by increased depreciation expense (up 35% yoy), higher IT expenses (up 95% yoy) and communication costs. FCMB still has one of the lowest operational efficiency figures within our Nigeria coverage. 

Loans grew by 7% qoq to NGN764bn in Q1 20 bringing FCMB’s loan-to-funding ratio – as prescribed by the CBN – to 59%. Asset quality continued to improve as NPL ratio fell by 0.2ppts qoq and 0.9ppts yoy and provisions coverage rose by 15% over the quarter to 154%. Likewise, customer deposits rose by 6% to cross the NGN1tn mark in March 2020.

Stable capital ratios: FCMB’s group capital adequacy ratio is 17% and should support balance sheet growth over the medium term. 

Q1 20 results summary

NGNmnQ1 20Q1 19yoyQ4 19qoq

Net interest income

23,116

18,618

24%

19,146

21%

Net fee income

5,050

4,958

2%

5,414

-7%

Trading income

1,885

2,162

-13%

1,303

45%

Non-interest income

8,583

7,706

11%

7,185

19%

Total operating income

31,699

26,324

20%

26,330

20%

Operating expenses

22,595

19,742

14%

13,707

65%

Pre-provision profit

9,104

6,581

38%

12,624

-28%

Net impairment charge

3,420

1,721

99%

2,263

51%

Net Profit

4,722

3,618

31%

4,894

-4%

Net attributable profit

4,706

3,602

31%

4,870

-3%

Net loans

764,263

615,188

24%

715,881

7%

Total assets

1,888,005

1,425,280

32%

1,668,506

3%

Deposits

1,003,905

831,926

21%

943,086

6%

Net interest margin

5.20%

5.21%

 

4.70%


Cost/income ratio

71.3%

75.0%

 

52.1%


Cost of credit risk

1.69%

1.05%

 

1.20%


NPLs/loans

3.50%

4.40%

 

3.67%


Provision coverage

154%

144%

 

139%


ROE

10.1%

8.5%

 

10.7%


ROA

1.06%

1.01%

 

1.20%


Source: Company financials, Tellimer research