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.
1. FCMB Declares N3.02bn Profit in Q2'17 Results, (SP:N1.31k)
2. FCMB Group Plc H1 2017 Conference Call & Earnings Presentation - The Key Takeaways
3. FCMB Group Reports Q4 2016 Results - OCI Grew by 132% YoY to N2.6bn
4. FCMB Declares N14.34 bn Profit in 2016 Audited Results, (SP:N0.87k)
5. FCMB Group Announces Leadership Changes; Ladi Balogun to Emerge Group CEO
6. FCMB Group Records 168% Growth in Non-Interest Income in Q3'16 Results Due to FX Gains
7. FCMB Declares N12.98 bn Profit in Q3'16 Results, (SP:N1.05k)
8. FCMB Group Loan Loss Provisions Spike by 506 YoY to N10bn in Q2 16
9. FCMB Declares N15.67bn Profit in Q2 16 Result SP N1.41k
10. FCMB Plc - Elevated Provisioning Underpins a Difficult Start to 2016
11. FCMB Funding Income Grows by 13 QoQ in Q1 16 Results
12. FCMB Declares N1.65bn Profit in Q1’16 Result, (SP:1.02k)
13. FCMB is Upgraded to Neutral after Marked Sell-off
14. FCMB Q4'15 Conference Call & Earnings Presentation: The key takeaways
15. FCMB shares have shed -53% YTD, worse than the -11% return on NSEASI