FCMB was the only bank within our coverage to host an investor call following the release of slightly weak Q1 20 results. We summarise below some of the key points. We have a Hold recommendation on FCMB, with a TP of NGN1.90, and implied ETR of 15%.
Restructuring its loan book: FCMB plans to restructure 50% of its loan book (21% from oil and gas, 18% from retail, SME and consumer, 6% from the power sector and 5% others) as failing oil prices and the Covid-19 outbreak deal a serious blow to the economy. The revised loan terms also include a 6 to 12-month moratorium on principal repayments and an extension on loan maturities of up to 2 years. 37% of foreign currency (FCY) loans, which account for 52% of total Q1 20 loan book, have naira receivables making them susceptible to FX risk. FCMB has started to convert these loans to naira loans and expect to have concluded this before FY 20. Also, the CBN intervention loans, which amount to cNGN50bn (accounting for 7% of loans in Q1 20), have also been fully restructured with new rates of 5%.
Subdued asset quality risks: Restructuring loans via tenure elongations and regulatory forbearance should keep the NPL ratio within the bank's tolerance limit. However, FCMB expects increased cost of risk in FY 20 driven by higher provisioning across vulnerable sectors like oil and gas, SME, retail and trade.
Prudent accounting for revaluation gains: Revaluation gains were up 178% yoy primarily due to gains from FX income as FCMB’s net dollar position was US$150mn in Q1 20. It, however, declined 46.1% qoq as revaluation gains recognised in Q1 20 were accounted for on a straight-line basis as the bank tried to smooth out earnings (the audited H1 20 financial statement will reflect the actual position). Meanwhile, impairment charges surged by 61% yoy due to lower recoveries.
Increasing low cost liquidity: Continued focus on low cost deposits (77% of total deposits in Q1 20), as further action from the CBN – regulations and potential deduction for missing the Loan to Funding target of 65% (FCMB stands at 59% in Q1 20) – and increased CRR debits (effective CRR at 46% in Q1 20) could threaten the banks liquidity.
Potential Tier II capital raise: FCMB's Tier II capital raise in Q4 19 boosted its capital ratio (CAR at 17% in Q1 20 vs 15% in FY 19) and the capacity to grow its balance sheet. The bank plans to continue exploring Tier II opportunities while also maintaining a modest dividend payout ratio (8.2% in FY 19). As FCMB's cost of funds comes off, we could see some debt issuance from the bank over the medium term.
Outlook for FY 20
- Loan growth of 10-14%: Increased credit requirement especially from working capital requests should keep loan growth robust and FCMB should be able to maintain its double-digit full-year loan growth expectations. Strong organic loan growth (excluding revaluation gains) expected from consumer, SME manufacturing, agriculture and healthcare.
- Higher impairment charges due to higher ECL provisioning across vulnerable sectors and anticipated lower recoveries. Additional collective impairment will be set aside to offset losses in unhedged oil and gas upstream exposure (30% of oil and gas portfolio).
- Downward pressure on cost, but not from staff cost: At least 50% of the bank's work force (including sales staff) will continue to work from home in 2020 and at least 50% of its branches will remain closed (all ATMs are open).
- Others: The bank expects reduced non-interest income from lower customer activity in the subsequent quarters of 2020 as well as from reduced fee charges. Management also expects to see a slight increase in the lending rate via higher credit spreads, as market vulnerabilities are magnified and FX rate is dependent on the CBN’s unification and oil price movement.
We have a Hold recommendation on FCMB, with a TP of NGN1.90, and implied ETR of 15%. Despite its discounted valuation (FY 19f P/B of 0.2x vs Nigeria and frontier peers’ 0.4x and 0.8x average, respectively), FCMB’s operating efficiency remains weak and capital adequacy ratios are not as robust as its peers. Our preferred Nigerian banks are GTB, Zenith and Stanbic.