Strong FCMB Q2 Earnings Boosted by FX Gains

Proshare

Thursday, August 04, 2016 10:34am /FBNQuest Research

Maintaining Neutral rating despite marked increase to PT 
FCMB Group’s (FCMB) Q2 2016 headline earnings were strong and beat our forecast by a considerable margin. However, the stellar growth was largely driven by a strong boost to the other income line from fx and trading gains. Although funding income also contributed, its growth was more subdued (+18% y/y vs. 236% y/y for other income). Management did not provide any specific earnings / ROAE guidance.

However, it mentioned that fx gains of N9.0bn being carried forward for recognition in Q3 are likely to be tempered by a deterioration in asset quality, (mainly restructured O&G exposures) and a 150-200bp spike in the cost-of-risk to 3.5-4.0%. Consequently, our full year 2016 PBT forecast of N27.9bn is below the N32.5bn implied by the run rate of the H1 2016 results.

Although we have increased our risk free rate by 200bps to 14.5%, our new price target of N1.9 is around 77% higher, because of the strength of the earnings in Q2 and the fact that we have rolled forward our valuation to 2017E. Despite the significant upside potential of 45% implied by our price target, we retain our Neutral rating on the shares. We prefer to remain cautious as we still see the risk of NPLs surprising negatively relatively high.

Q2 PAT up 415% y/y, driven by fx gains
FCMB’s Q2 2016 PBT grew markedly by 271% y/y to N14.1bn. The stellar y/y growth in PBT was largely driven by foreign exchange gains of N15.3bn (N18.3bn H1 2016). The gains from fx were also the major factor behind the 78% y/y growth in pre-provision profits to N40.3bn and overshadowed a 506% y/y growth in loan loss provisions. Adjusting for the fx gains, the bank would have reported a pre-tax loss of -N1.3bn.

Further down the P&L, PAT grew phenomenally, by 415% y/y, thanks to a significant positive result of N2.6bn in other comprehensive income (OCI); this relates to the fx translation impact of foreign operations.

Moving back to pre-provision profits, although both revenue lines contributed to the strong growth on this line, the other income line which grew by 236% y/y was the key driver. Funding income grew by a more modest 18% y/y.

The sequential trends mirrored those observed on a y/y basis. PBT and PAT both grew by 538% q/q and 3,864% q/q due to the boost from fx gains and translation impact on the OCI line. Compared with our forecasts, PBT and PAT beat by 348% and 522%; again the significant gains from fx were responsible.

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