Monday, February 01, 2016 09:10 AM / FBNQuest Research
Event: FCMB Group reports Q3 2015 results
Implications: Concerns on asset quality likely to grow given scale of loss in Q3
Positives: 14% q/q growth in non-interest income; beat our forecast by 21%
Negatives: -N7bn pre-tax loss in Q3 on the back of significant loan loss provisions
Late last week Friday, FCMB Holdings (FCMB) published Q3 2015 results which showed pre-tax and after-tax losses of –N7.0bn and -N6.2bn respectively. Although almost all the key headlines items contributed to the loss, a 739% y/y spike in loan loss provisions to N11.5bn was the key driver behind the weakness in the results.
Further up the P&L, profit before provisions declined by -10% y/y, largely due to a 15% y/y reduction in funding income. Still on funding income, although interest expense fell by 23% y/y, this was completely offset by an -18% y/y reduction in interest income. In contrast, non-interest income came in flat y/y.
Sequentially, pre-provision profits were down by -5% q/q. Again, the weakness was driven by funding income (-13% q/q). Although non-interest income grew by 14% q/q, the growth on this line was not enough to provide an offset. The pre-tax and after tax losses reported by FCMB compare with PBT and PAT of N3.8bn and N3.2bn delivered by the company in Q2 2015.
Compared with our forecasts, profit before provisions missed by 10%, largely because of a negative surprise (-21%) on the funding income line. Although, non-interest income surprised positively, beating our estimate by 21%, the weakness on the funding income line proved more significant.
Further down the P&L, impairment charges came in 162% higher than our forecast and was the major driver behind the negative surprises in PBT and PAT relative to our N1.8bn and N1.5bn forecasts for both lines respectively. Earlier this month, FCMB’s management had issued a statement that the bank’s Q3 2015 results would be “materially below” expectations due to a “spike in impairments in the energy sector and the significant reduction in trade finance-related revenue due to FX illiquidity.
We had assumed that this statement related to the quarter; it is clear now that the bank was referring to the 9M period, given that the Q3 result turned out to be a loss. The bank also suggested that the weak trend continued into Q4 2015. FCMB’s loan loss provisions of N15.3bn for 9M 2015 implies a cost of risk of 3.6%.
When annualised, FCMB’s results imply a full year ROAE of 2.5%. We believe that tier 2 banks like FCMB will struggle to deliver ROAEs of more than 10% in 2016. Given the scale of the loss in Q3 or the negative surprise in loan loss provisions, we would expect the market to have major concerns as to what FCMB’s results will show in Q4 and through 2016.
We will not be surprised if worst case scenarios of losses start to feature in discussions. Having said that, the bank’s CAR of slightly over 18% is robust enough in our view. There is no read-across to the rest of the sector given that all the other banks had reported their Q3 results last year.
FCMB’s was delayed because the bank was auditing the accounts. We would expect investors to focus mainly on the provisions line when the bank hosts its conference call later this week.
The shares have shed -42% ytd, worse than the -17% return on the All Share Index. We rate the shares Underperform. Our estimates are under review