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FCMB Group Q4 2016 Results Review - Upgrading from Underperform to Neutral on Asset Quality Surprise

Proshare

Monday, April 03, 2017/11:56 AM/FBNQuest Research

Although FCMB’s Q4 2016 results showed that PBT declined by double-digit y/y, the PBT beat our forecast soundly. The variance was due to a significant positive surprise in loan loss provisions which came in -88% lower than our forecast.

Following the results, we have reduced our cost of risk assumption for 2017E to 3% (vs. guidance of <3%) from around 4.7% previously. The reduction underpins the 17.5% average increase to our PBT forecasts over the 2017-18E period and the 18% increase to our price target to N1.2.

Our new forecasts imply a -32% y/y decline in PBT to N11.0bn in 2017E, mainly reflective of a significant y/y (-42%) reduction in non-interest income due to the absence of fx gains and related trading income which featuredprominently in the 2016 results.

Our new price target implies a potential upside of 2.6% from current levels. As such, we upgrade our recommendation on the stock to Neutral from Underperform.

Q4 2016 PBT down 60% y/y

FCMB’s Q4 results showed that PBT of N2.1bn declined by -60% y/y. Despite the double-digit y/y decline in PBT, PAT came in flattish y/y, thanks to a 132% y/y growth in other comprehensive income to N2.6bn.

The key drivers behind the marked y/y decline in PBT were a -52% y/y reduction in noninterest income to N2.9bn and, to a lesser extent, loan loss provisions of N1.0bn (this compared with a write-back of N254m in Q4 2015).

As for funding income, it grew by 7% y/y. As such, the -52% y/y reduction in noninterest income proved significant and led to pre-provision profits declining by -10% y/y.

Sequentially, both PBT and PAT showed marked improvements over the pre-tax and after tax losses of –N2.1bn and –N2.6bn that the bank delivered in Q3 2016.

Compared with our forecasts, both PBT and PAT came in significantly ahead of our forecasts. On a full year basis, both PBT and PAT grew markedly, by 109% y/y and 165% y/y to N16.3bn and N18.5bn respectively.

The strong y/y growth was underpinned by an 85% y/y growth in non-interest income to N47.7bn. Although funding income also contributed, its growth was limited to 9%. The full year PBT and PAT were also higher than our forecasts, by 24% and 46% respectively.




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