FCMB is Maintaining Underperform Rating on Weak Outlook


Friday, February 05, 2016 09:37 AM / FBNQuest Research

20% cut to our 2016 EPS forecast post Q3 2015

Following FCMB Group’s (FCMB) results which surprised negatively, we have cut our 2016E earnings forecast by 20% and our price target by 22% to N0.5. The cut to our EPS forecast is mainly driven by a -7% reduction to our funding income estimate (we have raised our non-interest income forecast by 7.1% on the back of a better-than-expected Q3 result).

Although management guided to a 2016E loan growth target of 10% or slightly less, we have maintained a more conservative loan growth outlook of 5%. We expect the prevailing macro-headwinds to continue to weigh, particularly on asset quality.

We have kept our 2016E loan loss provisions forecast relatively unchanged at around N14.6bn based on a cost of risk estimate of 2.4%, despite the fact that management is hopeful of seeing some recoveries. As a result of these changes, we have reduced our 2016E PBT forecast by 20% to N4.2bn. Ytd, FCMB shares have shed -47.3% vs. ASI -17.9%. At current levels, our reduced price target implies a downside potential of -41%. We maintain our Underperform rating.

Weak Q3; spike in impairments underpin pretax loss of -N7.0bn 

FCMB‘s Q3 2015 results 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 weak 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. 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 was 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. 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 significant. Further down the P&L, impairment charges came in 162% higher than our forecast and were the major driver behind the negative surprises in PBT and PAT relative to our N1.8bn and N1.5bn forecasts for both lines respectively.

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