FCMB Group Research Q4 2019 Results Review: Maintaining Neutral Rating

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By FBNQuest Research

15% increase to our 2020-21E EPS forecasts  

FCMB’s management did not provide an earnings or ROAE guidance for 2020 on its Q4 2019 conference call. However, it acknowledged that near-term macroeconomic challenges arising from the COVID-19 pandemic and the sharp drop in crude oil prices will exert downward pressure on key revenue lines, particularly trade finance and transaction commissions.

Also, the subdued oil pricing environment is likely to have a negative impact on asset quality, particularly from its oil and gas upstream & midstream exposure which accounts for 22.3% of its loan book. Against this backdrop, management expects that c.10% of its total loan book (and c.50% of its oil and gas upstream exposure) will be restructured via tenor extension and moratoriums and other policy measures of the CBN.

On a worst-case scenario – oil price at US$30 per barrel and a 40% devaluation of the naira, management sees the bank’s NPL ratio doubling to c7% but <8%. Despite the challenging outlook, we have increased our 2020-21E EPS forecasts by 15% on average due to the positive earnings surprise relative to ours in Q4 2019. Our new price target of N3.05 is also 14% higher. Our new forecasts imply a -15% y/y decline in the bank’s 2020E PBT to N17.2bn and a 340bp reduction in ROAE to 7.1%.

Regardless of the sizable upside potential of 108% implied by our price target, we retain our Neutral rating on the shares because we believe that the bank has a lower capacity to withstand macroeconomic shocks relative to its peers. This is reflected in its capital ratio, which is only 220bps higher than the regulatory minimum vs. an average of 21.2% for our coverage universe.

Q4 PBT up by strong double-digits y/y 

FCMB’s Q4 PBT grew handsomely by 99% y/y to N7.3bn. The key drivers were a 39% y/y reduction in opex and a 6% y/y increase in pre-provision profit. The growth in pre-provision profit was underpinned by a 16% y/y increase in non-interest income. Funding income growth was more modest at 2% y/y.

Thanks to a positive result of N6.2bn in other comprehensive income vs. -N5.3bn in Q4 2018, PAT grew to N12.7bn compared with an after-tax loss of -N1.7bn in Q4 2018. Sequentially, PBT advanced by 84% q/q, on the back of a -42% q/q reduction in opex.

Also PAT improved markedly to N12.7bn compared with the after-tax loss of -N1.0bn that the company reported in Q3 2019. Relative to our forecasts, PBT and PAT beat by a significant margin because of positive surprises in opex and OCI.

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