Monday, November 27, 2017 05:45PM /Vetiva Research
· PAT declines 58% y/y – 19% below our estimate
· Lower FX income offsets benefit of moderating loan loss provision
· Funding cost bites further – Interest Expense up 16% y/y
Earnings miss estimates despite q/q growth
FCMB released its 9M’17 result, reporting weaker than expected performances across major line items with PAT down 58% y/y to ₦5.5 billion – missing our ₦6.7 billion estimate. Notably, whilst Interest Income (₦96.3 billion) came in marginally ahead of our ₦94.0 billion estimate and up 3% y/y, significantly weaker Non-Interest Income (down 58% y/y) constrained Gross Earnings to a 16% y/y decline.
We recall that prior year’s income had been supported by an extraordinary ₦35 billion FX gain following the currency devaluation in 2016. With this income line normalizing to ₦1.0 billion for 9M’17, Non-Interest Income moderated to ₦18.7 billion – lagging our ₦20.7 billion estimate.
However, beating earlier run rate and coming in better than our ₦16.0 billion estimate, loan loss provision moderated significantly to ₦12.7 billion (9M’16: ₦34.5 billion) as improvement in the macroeconomic environment continues to support asset quality.
Higher funding cost however remained the notable pressure point with Interest Expense up 16% y/y to ₦46.4 billion (Vetiva estimate: ₦42.9 billion) amidst the elevated interest rate environment.
We highlight that despite 9M’17 earnings coming in significantly weaker y/y and lagging most of our estimates, q/q performance showed a modestly improving trend in Q3’17. Particularly, Interest and Non-Interest Income recorded mild q/q growth to support a 6% q/q rise in Gross Earnings.
Interest Expense however continued to trend higher, up 6% q/q despite a relatively flat q/q customer deposit and moderating interest rate environment. Also, Operating Expense rose 14% q/q to ₦17.6 billion – taking the expense line to ₦49.3 billion for 9M’17 vs. our ₦47.9 billion estimate.
Overall, Q3’17 PAT came in 70% higher q/q at ₦2.5 billion – taking 9M’17 performance to ₦5.5 billion (Vetiva estimate: ₦6.7 billion) and translating to a weak unannualized RoE of 3%.
TP revised to ₦3.23 (Previous: ₦2.93)
We have revised our estimates across most line items to reflect the earnings miss. Particularly, we cut our loan loss provision estimate for FY’17 to ₦16.9 billion (Previous: ₦21.3 billion) following improvements observed in Q3’17.
Despite the notable moderation in loan loss provision (down 63% y/y), we highlight bottom-line was little changed as weak top line offset the impact of lower provision. In line with management’s guidance and ytd trend, we maintain our expectation of a 3% y/y moderation in loan portfolio for FY’17 as the bank continues to take a more cautious credit growth stance.
We expect higher Interest cost burden to continue to weigh on earnings amidst the uptick in cost of funds and raise our Interest Expense estimate to ₦65.9 billion (Previous: ₦63.8 billion). We recall that FCMB acquired additional 60% interest in Legacy Pensions Managers Limited last week, taking its stake in the firm to a controlling holding of 88.2%.
We expect the acquisition to further enhance the Group’s diversification strategy and support profitability going forward. With this, despite the significant deviation from the Non-Interest Income line, we revise our Non-Interest Income estimate to ₦28.6 billion (Previous: ₦27.6 billion).
Overall, we revise our PAT estimate for FY’17 to ₦11.1 billion (Previous: ₦9.0 billion) and raise our Target Price to ₦3.23 (Previous: ₦2.92). We remain optimistic about the medium to long term outlook of FCMB and believe the stock remains largely undervalued. FCMB trades at an FY’17 P/E and P/B of 1.9x and 0.1x vs. our coverage banks’ average of 4.6x and 0.8x respectively.