FCMB Group Loan Loss Provisions Spike by 506% YoY to N10bn in Q2'16

Proshare

Friday, July 29, 2016 2:51pm/ FBNQuest Research

Event: FCMB Group reports Q2 2016 results
Implications: Likely upward revision to consensus 2016 PBT estimate; market’s reaction likely to be positive
Positives: PBT and PAT grew by 271% y/y and 415% y/y respectively due largely to fx gains
Negatives
:
Loan loss provisions spiked by 506% y/y to N10.0bn   
 

This morning the NSE published FCMB Holdings (FCMB) Q2 2016 results which showed that PBT grew markedly by 271% y/y to N14.1bn. The stellar y/y growth in PBT was largely driven by foreign exchange gains of N15.3bn (N18.3bn H1 2016). The gains from fx were also the major factor behind the 78% y/y growth in pre-provision profits to N40.3bn and overshadowed a 506% y/y growth in loan loss provisions. Adjusting for the fx gains, the bank would have reported a pre-tax loss of -N1.3bn.  

Further down the P&L, PAT grew phenomenally by 415% y/y, thanks to a significant positive result of N2.6bn in other comprehensive income (OCI) following gains from the translation impact of foreign operations. Moving back to pre-provision profits, although both lines contributed to the strong growth on this line, the other income line which grew by 236% y/y was key driver.  

Funding income grew by a more modest 18% y/y. The sequential trends mirrored those observed on a y/y basis. PBT and PAT both grew by 538% q/q and 3,864% q/q due to the boost from fx gains and translation impact on the OCI line. Compared with our forecasts, PBT and PAT beat by 348% and 522%; again the significant gains from fx were responsible. Excluding the gains from fx in Q2, our PBT forecast of N3.1bn was ahead of the underlying result (pretax loss of –N1.3bn). 

In terms of the balance sheet trends, FCMB’s loans and deposits grew by 17% q/q and 5% q/q respectively. Given that about 40% of its loan book was denominated in foreign currency in Q1, the 17% y/y growth in risk assets was due to the devaluation of the naira to around N282.5 per US$ from N199.0 before the adoption of the flexible exchange rate regime. Adjusting for the naira devaluation impact, the loan book would have been flat q/q.

Although management had indicated that it intended to make recoveries of N4.0-N6.0bn in 2016, the loan impairment charges grew markedly by 506% y/y to N10bn. We believe that provisioning for fx loans based on the new exchange rate is partially responsible for this significant spike in provisions and the annualised cost of risk of 6.5%. We would be looking to management for further clarification on this line. 

The bank’s H1 PBT of N16.3bn tracks ahead of consensus 2016 of N10.2bn. As such, we expect to see marked upward revisions to consensus 2016 forecasts and a positive reaction from the market over the next few days. At current levels, on our published estimates, FCMB is trading on a 2016E P/B multiple of 0.2x for 3.8% ROAE in 2017E. The shares have shed -20.7% ytd, worse than the -2.1% return on the All Share Index.  

We rate the shares Neutral. Our estimates are under review. 

FCMB Group Q2 2016 results: actual vs. FBNQuest Research estimates (N millions)

 

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