Tuesday, November 28, 2017 09:05AM /FBNQuest
Single-digit increase to our earnings forecasts and price target
FCMB Group’s (FCMB) Q3 2017 results were broadly in line with our forecasts. Nevertheless, we have increased our 2017-18E earnings forecasts by around 7% on average on the back of the expected boost to earnings from the consolidation of Legacy Pensions Managers (Legacy).
Although management did not quantify expected (revenue) synergies, it disclosed that
Legacy is on track to deliver c.N1.3bn in PBT in 2017E. Besides Legacy, a reduction in our 2017E cost-of risk assumption to 2.7% from around 3.0% previously is also supportive of earnings. Furthermore, following the full recognition of the AMCON levy in Q3 2017 our opex forecast of around c.N16.6bn for Q4 2017 is 6% lower vs. Q3 2017. However, our 2017E opex is up by around 2% due to the inclusion of our opex estimate for legacy.
These revisions underpin the 4% increase to our price target to N1.50. We now expect FCMB to deliver an ROAE of 5.4% in 2017E, around 40bps higher than our previous forecast. Although the shares have underperformed the ASI ytd (-2.7% ytd vs. 38.8% ASI) and our price target implies a potential upside of around 40% from current levels, we would like to see sustained improvement in the bank’s underlying performance first because changing our recommendation. Consequently, we retain our Neutral rating on the stock.
Marked growth in earnings due to positive base effects
FCMB’s Q3 2017 results showed that PBT and PAT grew to N3.0bn and N2.7bn, compared with the pre-tax and after-tax losses of -N2.1bn and – N2.6bn that the bank reported in Q3 2016. The marked y/y growth in earnings was driven by positive base effects on the provisions line which was -87% lower on a y/y basis.
Recall that FCMB’s Q3 2016 results were weighed down by an 82% y/y spike in loan loss provisions to N21.0bn, mainly due to exposures to the oil and gas downstream sector.
The reduction in provisions more than offset the weakness in pre-provision profit which declined by -35% y/y. Of the two revenue lines, the non-interest income line which fell by -69% y/y was primarily responsible for the y/y decline in pre-provision profit. The growth in funding income was subdued at 5% y/y.