Wednesday, April 3, 2019 3:11PM / FBNQuest
10% avg. cuts to our 2019-20E EPS forecasts and price target
FCMB Group’s Q4 2018 pre-tax earnings came in well behind our forecast mainly because of a negative surprise in non-interest income. As such, we have cut our EPS forecasts by an average of 10% over the 2019-20E period and our price target by a similar magnitude to N2.58.
On its earnings conference call, management disclosed that following the improved macroeconomic outlook and the stable fx environment, it does not see fx revaluation gains which featured prominently in the 2018 results to re-occur in 2019. As such, our earnings forecasts are devoid of fx gains and are primarily underpinned by average cuts of c.13% to our non-interest income forecasts.
Although we have cut our 2018 cost-of-risk assumption by c.20bps to 2.5%, it is still more conservative than the 2.0% that management has guided to. Following the downgrades to our earnings forecasts we now expect FCMB to deliver a 2019E PBT of N17.5bn (-5% y/y) or an implied ROAE of 7.5%.
On a relative basis, FCMB trades on a 2019E P/B multiple of 0.2x for 8.2% ROAE in 2020E. However, it’s P/B multiple is at a significant (-75%) discount to the 0.74x P/B multiple for 18.2% ROAE that our universe of bank stocks is trading on. Our new price target implies a potential upside of 36% from current levels. However we are downgrading our recommendations on the shares to Neutral from Outperform on the back of its subdued earnings outlook.
Q4 PBT down -4% y/y driven by decline in pre-provision profit
In contrast to its Q3 2018 results which showed triple-digit earnings growth y/y, FCMB’s Q4 2018 PBT declined by -4% y/y to N3.7bn. The key earnings driver was a -25% y/y reduction in profit before provisions.
To a lesser extent, an 11% y/y rise in opex also contributed. Although the bank made net recoveries of N514m during the quarter, the y/y decline in pre-provision profit proved significant and completely offset the positive from the provisions line. Further up the P&L, both revenue lines contributed to the y/y reduction in pre-provision profit.
However, non-interest income which fell by -54% y/y was the weaker of the two. Funding income also declined by -6% y/y. Below the tax line, the bank reported a post-tax loss of –N1.7bn mainly driven by a negative result of -N5.3bn in other comprehensive income. Sequentially, PBT fell by -52% q/q mainly because of a 63% q/q decline in non-interest income. The post-tax loss of –N1.7bn also diverged widely from the PAT of N13.2bn that the bank delivered in Q3 2018.
7. Fitch Affirms Nigeria's FCMB at 'B-'; Outlook Stable