FCMB is Upgraded to Neutral after Marked Sell-off


Friday, April 01, 2016 9:30AM /FBNQuest Research

Earnings upgrade on potential further recoveries and cost cutting
We upgrade our recommendation on FCMB Holdings (FCMB) to Neutral from Underperform, following a marked sell-off on the shares ytd (-47.9% vs -11.6% ASI). We believe the damage from Q3 2015 profit warning is more than reflected in the share price now.

Furthermore, FCMB’s Q4 2015 results surprised positively, driven by net recoveries of N254m, reversing some of significant provisions (N11.5bn) which weighed on Q3 2015 results. We have increased our 2016E EPS forecast by 99% to N0.36 and our price target by 110% to N1.10 on the back of reductions of 4% and 12% to our 2016E opex and loan loss provision forecasts respectively.

Our opex and impairment forecasts imply flattish y/y growth and a cost of risk of 2.1% respectively. These are conservative relative to the -7% y/y decline implied by management’s cost reduction target of N5.0bn and a cost of risk guidance of 2.0%. Given the extent of the sell-off in the shares, they are now trading on a current P/B multiple of 0.1x vs an average of 0.3x for our coverage universe.

To become more positive on the shares, we would need to see sustained improvement in asset quality. Growth has been put on the back foot: guidance calls for loan growth of just 5% in 2016. These explain why we still expect another year of sub-5% ROAE in 2016E.

PBT down 27% y/y but improved markedly q/q on recoveries
FCMB’s Q4 2015 PBT improved to N5.2bn from the –N7.0bn loss that the bank reported in Q3. However, PBT still declined by -27% y/y, driven by a -32% y/y reduction in profit before provisions to N21.4bn. Although the bank made recoveries of N254m and opex declined by -5% y/y respectively, the positives on both lines were not enough to offset the double digit y/y decrease in pre-provision profits.

Despite a 2.8x expansion in other comprehensive income, PAT fell by a wider margin of -52% y/y (than that seen in PBT) because of a tax rebate of N750m in Q4 2014. Further up the P&L, both revenue lines contributed to the weakness in pre-provision profits.

However, funding income which was down by -35% y/y had a greater impact. On a sequential basis, the PBT and PAT of N5.2bn and 4.0bn were marked improvements over the pre-tax and after tax losses of -N7.0bn  and  -N6.2bn that the company reported in Q3 2015. Compared with our forecasts, both PBT and PAT came in well ahead of our estimates largely because the provisions line surprised positively.

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