Equity Analysis /

FCMB Group: Q2 19: Earnings trend supported by one-offs, Hold

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tellimer Research
    31 July 2019
    Published by

    Q2 19 net attributable profit rose 25% yoy to NGN3.9bn, ahead of our NGN2.5bn forecast, largely due to: 1) NGN1.1bn reversal in provision for litigation; 2) a lower-than-expected effective tax rate of 14% vs our 18% forecast and 19% in Q2 18; and 3) a lower-than-expected decline in non-core revenues. On the downside: 1) the cost of risk was slightly higher than forecast due to a sharp drop in recoveries; 2) net fee income was flat yoy and below our expectation; and 3) liquidity seems to have weakened qoq. 

    Maintain Hold; our unchanged TP of NGN1.90 implies ETR of 24%. A weak market has contributed to the 13% price decline for the stock ytd, hence its depressed valuation (FY19f P/B of 0.2x vs Nigeria and frontier peers’ 0.6x and 1.1x average respectively). However, FCMB’s weak operating leverage, and tight liquidity and capital adequacy ratios mean we keep our Hold, considering the weak operating environment and ongoing regulatory changes. We prefer banks like GTBZenith and Stanbic

    Revenue growth was largely driven by the balance sheet, as margins and non-core revenues declined. Net interest income was up 14% yoy despite a decline in margins, gaining support from stronger e-banking and credit-related fees to offset the declines in trading/FX income, service fees/commissions and asset management fees. Asset allocation shifted towards investment securities and bank placements (30% total allocation from 24% in Q1 19), likely due to the weak operating backdrop and/or need to stabilise the CAR, which was 1.0ppt below the regulator’s prescribed level at end-FY 18, after a full IFRS 9 adjustment. 

    Operating expense flattish yoy due to significant reversal on litigation provisions and a 9% decline in recognised AMCON charges. Excluding these, other operating expense rose 14% yoy to account for 66% of revenue (from 62% in Q2 18) largely due to higher personnel, IT and contract services/training costs. Cost of risk was also above expectation at 1.8% (vs 1.1% forecast), while effective tax rate was lower than our forecast and could be adjusted upward in H2 19. 

    Liquidity seemed to tighten qoq based on: 1) the sharp increase in interbank borrowings, which more than offset higher placements with local and foreign banks; 2) an uptick in gross loans/deposits which, although better than H1 18, was moderately above Q1 19 at 81%; and 3) an uptrend the term deposits balance and contribution. On a positive note, the NPL ratio was stable at 4.3% and loan provisions/NPLs improved to 158%.