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 GTB, Zenith and Stanbic.
Key positives
- Net interest income was up 24% on account of high volume growth in interest-earning assets and lower funding costs.
- Cost/income ratio was down 3.7ppts to 71% as higher core revenues outweighed a 14% increase in operating expenses.
- NPL ratio improved by 0.2ppts and provisions coverage increased to 154%.
Key negatives
- Trading income was down 11% yoy owing to a 72% decrease in FX income
- 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
| NGNmn | Q1 20 | Q1 19 | yoy | Q4 19 | qoq |
|---|---|---|---|---|---|
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