16% cut to our price target due to +150bp adjustment to risk-free rate
FCMB's Q1 '21 PBT of NGN4.2bn was in line with our forecast. However, PAT missed by a wide margin because of a negative result of -NGN1.6bn in other comprehensive income (OCI). On its conference call, management was optimistic of an improved earnings performance in FY '21 compared with FY '20. However, it did not provide specific guidance on key metrics. Going forward, we expect earnings to benefit from improved asset yields and double-digit loan growth (of c.12%).
Regardless, we have cut our FY '21f EPS forecast by 5% because of the negative result in OCI. However, our new price target of N3.27 is about -16% lower because we have increased our risk-free rate by 150bps to 12.5% to reflect the rise in government bond yields. Although the acquisition of AIICO pensions which should be concluded later this year will contribute modestly to FY '21 earnings, the contribution will be tempered by one-off restructuring charges (of an undisclosed amount) related to the acquisition. Beyond 2021, the acquisition could add another N270m to Group PBT. With respect to asset quality, we are encouraged to see that FCMB's NPL ratio declined by 10bps q/q to 3.2%. Also, its provision coverage ratio (including regulatory risk reserves) remains healthy at c.179%.
However, with a CAR (including transition arrangement) of 16.5%, the bank's capital buffers are precipitously close to the regulatory minimum of 15%. Its liquidity buffers are also under pressure at c.33.5% (vs. 30% regulatory minimum). Following our earnings revisions, we now expect FCMB to deliver PBT of NGN22bn, or flattish growth y/y. Having shed -12.9% ytd vs -2.9% for the NSE ASI, FCMB shares are trading on a '21f P/B multiple of 0.2x for 9.1% ROAE in '22f. These represent a considerable discount of c.60% to the 0.6x multiple for 14.3% ROAE that our universe of banks stocks is trading on. Our new price target of NGN3.27 implies a potential upside of c.13% from current levels. Nevertheless, we keep our Neutral rating on the shares because of the bank's weak capital and liquidity buffers.
Q1 '21 and Q4 '20 PBT down by -22% y/y and -17% y/y respectively
Pre-provision profit declined -7% y/y, driven by reductions of -8% y/y and -5% y/y in funding and non-interest income respectively. Following the y/y reduction in revenues, PBT fell -22% y/y to NGN4.2bn. PAT after other comprehensive income (OCI) fell by a wider margin of -59% y/y to NGN2.0bn, because of a negative result of -NGN1.6bn in OCI vs +N106m in Q1 '20. In Q4 '20, PBT fell -17% y/y to NGN6.1bn because of increases of 52% y/y and 33% y/y in loan loss provisions and opex respectively. Below the tax line, the decline in PAT narrowed to -4% y/y, thanks to a positive result of NGN6.9bn.