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FCMB Group - Retaining Neutral recommendation post Q2

Proshare

Wednesday, August 2, 2017 11:40AM/ FBNQuest Research

Rolling over to 2018

Following FCMB’s Q2 2017 results, we have increased our EPS estimates over the 2017-18E period by an average of 12%.


This is because we have chosen to limit the impact of the weaker-than-expected non-interest income result in Q2 that we carry forward, offsetting it with the impact of the positive surprise in operating expenses.


This, combined with our decision to roll over our valuation to end-2018, largely explain the 42% increase in our price target to N1.43. FCMB’s balance sheet changed little in H1. H2 is expected to show improvements because the loss of deposits in Q2 (-8% q/q) was linked to improved fx liquidity via NAFEX.


Guidance calls for a further reduction in the loan book (-2% year-to-June) in favour of fixed income assets. We continue to see FCMB’s ROAE below 10% for the foreseeable future; as such our fair value P/B multiple remains well below 1.0x (at 0.15x).


Our forecasts assume that the bank’s asset quality profile does not deteriorate beyond current levels. Management reiterated a 3% cost of risk guidance for 2017 (no impact from 9Mobile, formerly Etisalat, for now).


In H1, the cost of risk ratio matched this guidance. From current levels, our new price target implies upside potential of 14.6%. Year to date the shares are up 13.6% (ASI: 36.6%). We retain our Neutral rating.


Substantial decline in profits due to negative base effects

FCMB’s Q2 2017 results showed a marked fall in profits: PBT fell -87% y/y while PAT was down -92% y/y.


This was mainly because of negative base effects. Last year’s results were propped up by significant one-off fx-related gains; they explain why non-interest income was down -75% y/y to N5.3bn.


Net interest income also fell, by -13% y/y to N17.0bn because of a spike in interest expense. Interest income was up only 1% y/y. The marked reduction  in both revenue lines proved significant relative to a 50% y/y fall in loan loss provisions – and to a lesser extent – a 5% y/y decline in operating expenses to lead to the PBT decline.


On a q/q basis, although funding income grew q/q, non-interest income was again down visibly. This contributed to a -7%  q/q decline in PBT. Compared with our estimates, although funding income was in line, non-interest income missed by 26%, leading to profit before provisions coming in 8% below our forecast.


Provisions were as we expected but opex surprised positively by 7%. However, this was insufficient to offset the weak revenue.






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