Monday, May 9, 2012

•FCMB recently released forecast financial figures for Q2 2012. We assess these figures to gain a glimpse into management’s expectation and fine-tune our drivers for financial performance going into 2012.  
 

Topline: Still looking to higher rates and expanded balance sheet
•FCMB expects revenue of N26.3 billion which is a mild 3% improvement on Q1 2012 results. The rate environment should remain favourable for industry revenues but for FCMB growth will also reflect the impact of the Finbank acquisition. If FCMB’s estimates materialise, YoY growth will slow to 48% in H1 2012 from 54% in Q1 2012. This supports our view that the base effect that has had a significant impact on industry revenue growth in Q1 2012 will start to fade as progressive tightening through 2011 becomes reflected in base figures. Nevertheless, the estimate appears moderate and we believe the risks are more to the upside, potentially driven by increasing impact of the Finbank acquisition as well as increased transaction velocity.
 

Interest expense: funding pressures still here
•FCMB expects interest expense to increase 4% QoQ to N9.95 billion in Q2 2012. Thus, it appears the rate environment continues to have a greater impact on FCMB’s interest expense than its income. Notwithstanding, the compression in spreads implied by the estimates is not as great as in Q1 2012 results.
 

Operating expense: a tad too optimistic
•In discussing Q1 2012 results, FCMB indicated that the Finbank acquisition accounted for 40ppt of the 49% YoY growth in opex. Management forecast for Q2 2012 anticipates a 18% QoQ dip to N9.9bn. We find this surprising in light of a N3bn restructuring charge it expected to take in the quarter which we believe should materially crystallize with the closure of 44 branches in April 2012. Consequently, we still expect that cost synergies will only kick in after H2 2012.
 

Provisions: some more on the way
•After net writebacks of N360 million in Q1 2012, FCMB expects to book a charge of N1.6 billion in Q2 2012. This appears to justify the cautious position we took on provisions as expressed in our Q1 report to the effect that the bank’s public sector exposure could still result in further charges, especially in the light of relatively low coverage of 50% on the specific exposure that drove charges from this segment in 2011. Furthermore NPL ratio doubled QoQ to 5.6%. Notwithstanding, improved provisioning policies, full resolution of all legacy loans and adequate coverage ratio of 113%  on aggregate NPLs should keep the level from being excessive.
 

Tax rate: more normal
•The estimates culminate in expected PBT of N4.9 billion for Q1 2012, an 11% QoQ increase. However, PAT is expected to decline 11% QoQ to N3.65 bn largely due to a jump in tax allowance. The implied rate of 25% is much greater than 7% recorded in Q1 2012. Nevertheless, recalling management’s assertion that a low tax rate (10%) will help meet its N19 bn PAT target the quarter we have opted for a mid-range estimate of 17% pending actual results or a change in management expectations on this front.
 

Broadly realistic set of expectations
•We find the overall figures and implied directions of financial outcomes broadly in line with our own expectations. However, we have revised our revenue estimates moderately higher largely to account for expected increased contribution from Finbank which currently accounts for only 8% of risk assets. The forecasts also appear to support our expectation that much of the improvement will come from fee-based income, hinged on increased transaction velocity on the enlarged platform. In Q2 2012, FCMB expects flat interest income QoQ but a 14% rise in non-interest income to N6.7 billion.

•The acceleration management expects in interest expense suggests we may have been aggressive in factoring funding synergies for FCMB. Consequently, the impact of the incremental revenue has been offset by upward adjustments to interest expense. Nevertheless, we expect some improvement to materialize in tandem with the general progress with integration.

•We maintain our opex estimates against the improvements management expects. If Q2 run-rate is maintained, CIR would come in at 64% for FY2012E implying a 15ppt improvement from Q1 2012 levels, which, as we highlighted earlier, matches the run rate in FY2011. However, our expectations for cost-synergies in H2 2012 have been tempered by integration costs and overall inflationary pressures.  Consequently, forecast CIR 2012E at 63% which implies higher opex than projected by management. We have also made mild adjustments to provisions and tax rates. Overall, we continue to expect significant improvement in the company’s operational performance. However, we have revised our discount rate higher to account for increased integration risks especially as capture of synergies appears to be progressing somewhat slower than we envisaged.
 

Valuation still attractive
•Our revisions have culminated in a moderate decrease in our fair value estimate to N9.04, which nevertheless remains 68% higher than FCMB’s current price. FCMB currently trades at forward 7.9x2012EPS which is ahead of peer average of 6x. However, P/Bv of 0.7x represents a considerable discount to the industry average of 1x.

•Consequently, we reiterate our BUY rating on the stock.
 

Source: Company financials, ARM Estimates

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