FCMB: Impact of regulatory headwinds still visible


Monday, August 03, 2015 08:58AM / FBN Capital Research   


Cuts to earnings forecasts after Q2 2015 results:

The loss of c.N6bn in revenue on an annualised basis due to CRR harmonisation and (related) a -6% decline in the loan book explain why FCMB’s Q2 2015 results were weaker than expected.

The bank’s end-2015 loan book target implies low single-digit y/y growth at best vs at least 10% previously. We acknowledge that the guidance implies healthy high single-digit growth from end-June levels, driven by seasonality (the agriculture sector, for example).

Asset quality ratios are still holding up: management reiterated a cost of risk guidance of close to 1.8% for the full year (we remain conservative with an assumption of 2.0%). Notwithstanding, the weaker revenue outlook has led us to reduce our 2015E EPS forecast by around 27%, and 2016E EPS by 46%.

Consequently, we have cut our price target by 29% to N3.4. We retain our Neutral recommendation

Q2 results weighed down by lackluster revenue:
FCMB’s Q2 2015 PBT fell markedly by -32% y/y to N3.8bn. The weakness was driven by a -3% y/y decline in profit before provisions and a 33% y/y rise in loan loss provisions to N1.6bn.

Despite the growth on the provisions line, FCMB’s impairment charges were quite subdued relative to those of other banks that have reported their Q2 results. The -3% y/y decline in profit before provisions was due to a -19% y/y reduction in non-interest income.

In contrast, funding income grew marginally by 5% y/y to N16.4bn (we should highlight that the funding income performance was weaker than expected). Further down the P&L, PBT and PAT declined by around 30-32% y/y.

Sequentially, PBT and PAT also declined by 34% q/q and 45% q/q respectively because weakness in both funding and non-interest income offset a 22% q/q decline in loan loss provisions.

Compared with our forecasts, PBT missed by 39% largely because of negative surprises on the funding income line as aforementioned, despite loan loss provisions coming in lower than we were expecting.

The weakness in funding income was driven by a combination of declines in the loan book (-1% q/q in Q2, -6% q/q in Q1) and weaker net interest margins (8.1% in Q2 vs 8.8% in Q1) due to the opportunity cost related to CRR harmonisation

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