04, 2020 / 09:33 AM / by FBNQuest Research / Header Image Credit: Ecographics
Material increase to price target due to cut to risk-free rate
FCMB's Q3 '20 PBT grew strongly y/y and came in c.5% higher than our forecast. However, PAT missed by a wide margin because of a negative result of c.-NGN4bn in other comprehensive income (OCI). On its conference call, management disclosed that c. NGN2.2bn of fx revaluation gains will be recognized in its Q4 '20 results. Having made allowances for these gains, our '20f non-interest income forecast is c. 6% higher. As such, the -6% reduction to our '20f EPS forecast does not fully reflect the extent of the earnings miss relative to our forecast. FCMB's ROAE has been range-bound between low single-digits and 10% since 2015.
Our '20f forecasts imply an ROAE of 10.7%, consistent with its 5-year historical ROAE trend. The bank's returns profile has been constrained by an elevated cost-to-income ratio in the mid-to-high 60% range, and historically high cost-of-risk of >2%. More recently, its liquidity buffers have come under severe strain (Q3 '20 liquidity ratio of 33.5% vs 30% regulatory minimum) due to discretionary debits for CRR by the CBN. However, the bank's liquidity position is likely to be strengthened by the CBN's recent move to securitize banks' excess cash reserve via its special bills.
Although still below the regulatory minimum, FCMB's asset quality (NPL) ratio deteriorated by 90bps q/q to 4.4% due to a spike in NPLs for the oil & gas loan book. On a positive note, management indicated that it expects to receive regulatory approval for its acquisition of AIICO Pensions before the end of the year. Given FCMB Pensions' AUM size of c.NGN340bn, when concluded the AIICO merger will take its total AUM to .c.NGN500bn and move it to number 7 from 9 on the league table.
Despite the downgrades to our earnings forecasts, our new price target of NGN4.96 is c. 45% higher because we have lowered the risk-free rate driving our valuation model to 6% from 12.5% previously. Our new price target implies a potential upside of 68% from current levels. Nevertheless, we keep our Neutral rating on the shares because we see better upside within our coverage universe.
Q3 PBT up 20% y/y driven by solid funding income growth and decline in opex
FCMB's Q3 PBT was up 20% y/y to NGN4.8bn. The solid earnings growth was driven by pre-provision profit growth of 9% y/y and a 7% y/y reduction in opex. These positives overshadowed a 138% y/y increase in impairments for credit losses.
In terms of revenue, funding income grew 30% thanks to the low interest rate environment which drove a reduction in funding cost, and a y/y expansion in earning on risk assets. In contrast, non-interest income declined by 22% y/y because of a 58% y/y reduction in other income. PAT came in at NGN361m (-N1.0bn in 'Q3 2019).