FCMB Group reported a 42% yoy increase in profit to NGN6bn for Q3 21, far better than our expectation of a 29% drop. The most significant driver of its profit growth was lower loan impairment costs (down 90% yoy), a trend noticeable with other peers. This is expected, given the improved outlook for business activities compared to what was obtainable in 2020.
Across the group's revenue lines, it performed better than expected. We had expected the group's net interest income to decline 25% as a result of higher funding costs – given the tight system liquidity and CBN's continued CRR debits, as well as lower asset yields particularly on its investment securities book (no thanks to special bills). However, it fell by 1%, as impressive growth in interest income from loans helped lower the effect of increased funding costs.
Non-interest income was also better than expected (up 10% yoy vs -1% expected), as a result of strong growth in digital banking revenue (up 41% yoy), which highlights FCMB's digital push as itself and peers continue to face pressure on interest margins. The group also reported positive trading income during the period.
However, FCMB continued to have a challenge with cost management, as operating expenses grew 17% yoy compared to our 3% forecast. As a result, cost to income remained well above the 70% mark. Overall, the group’s profitability metrics improved, with ROE and ROA at 10.5% and 1.1% respectively, compared to 8.1% and 0.9% in Q3 20.
We upgrade FCMB to Buy
We upgrade our recommendation on FCMB to Buy (from Hold), with an unchanged 12-month target price of NGN3.6/share. At its current share price, which has declined in recent times, the stock's expected total return is 22%.
Positives for the group are its efforts at ramping up electronic banking and digital lending solutions, which should continue to boost the contribution of non-interest income to total revenues, and improve the accumulation of retail deposits. The recent AIICO acquisition is positive for increased contribution from its wealth business to total revenues and profits in the near term.
FCMB is currently trading at 3.9x FY 21f PE and 0.27x tangible PB, a discount to the average 4.2x FY 21f PE and 0.54x tangible PB of our Nigeria banks coverage.
Non-interest income grew 10% yoy (up 8% qoq). The key drivers were trading income (up 119% yoy) and e-banking revenue (up 41% yoy).
Loan impairment charges dropped 90% yoy (down 85% qoq), given the slightly improved outlook on the economy. As a result, cost of risk for Q3 fell to 0.1%, compared to 1.8% in Q3 20.
Profitability metrices improved, with Q3 21 ROE and ROA at 10.5% and 1.1% respectively, from 8.1% and 0.9% in Q3 20.
The group’s NPL ratio declined by 0.1ppts qoq to 3.2%. Provisions coverage declined qoq, but remained robust at 156%.
The group saw a decline in net interest income of 1% yoy, although better than the 25% decline expected. Interest income from loans and advances was up 38% yoy, watering down increased pressure on funding costs (87% growth in interest expense from customer deposits).
Operating expenses grew 17% yoy, as a result of major increases in AMCON levies and IT expenses. As a result, the cost to income ratio grew to 76.9%, from 67.3% in Q3 20.
Similar to peers, the group’s CASA ratio declined to 69% from 73% in Q2 21, due to a 20% qoq increase in term deposits vs a 31bps drop in current and savings.
Its capital adequacy ratio fell 0.4ppts qoq to 16.7%, while its liquidity ratio fell qoq 2.6ppts qoq to 33.1%.