Equity analysts have advised investors to sell FCMB Plc. (Ticker: FCMB) as liquidity strain threatens the financial year 2021 earnings outlook. In its equity report, a multi-asset investment firm, CardinalStone Partners said FCMB stock is expensive, as such advised investors to sell now before price correction.
The bank stock had closed at ₦3.05 on the Nigerian Exchange with 19.802 billion outstanding shares, bringing the bank market value to about ₦60.4 billion.
On the projected earnings drop in 2021, the financial service boutique in the Tier-2 category started off the year on a weaker note as profit dropped.
Specifically, FCMB profit after tax shrank 24% in the first quarter of (Q1) 2021 when compared with its Q1-2020 result after a meteoric growth recorded in its audited scorecard for 2020.
CardinalStone said in its equity report that it is expecting liquidity strain to cap the bank’s capacity to create sufficient interest-earning assets and lead to pressures on interest income.
Invariably, FCMB’s weak liquidity position will impact its core earnings after a solid outing in 2020. On that note, CardinalStone analysts cut the bank’s target price by 10.45% due to a weak earnings outlook.
FCMB Downgraded as Liquidity Pressure Threatens 2021 Earnings
Standing on its estimate that FCMB is overpriced by a quid and a half, CardinalStone cuts 12- month target price to ₦2.40 from ₦2.68 and maintains a sell rating on the ticker.
“We expect liquidity strain to cap the bank’s capacity to create sufficient interest-earning assets and lead to pressures on interest income”, CardinalStone said.
Meanwhile, CardinalStone’s target price of ₦2.40 appears lower when compare with ₦2.88 set by equity analysts at Meristem Securities in April 2021.
Also, CardinalStone said milder naira devaluation and rising yields are likely to trim revaluation and trading gains from the non-interest income front and cause further earnings drag.
“FCMB is trading on a current price to book ratio of 0.26x on the financial year 2021 return on equity 7.3% which appears expensive relative to its target price to book of 0.20x and its four-year historical average of 0.22x”. It noted that its historical return on equity was 7.8%.
In the first three months in 2021
In its first quarter (Q1) 2021 results, FCMB reported a 12% year-on-year drop in gross earnings to ₦43.2 billion as a result of a 14% fall in interest income to ₦33.0 billion.
The drop in interest income from its bucket of interest-earning assets was caused by a 60% decrease in income from investment securities alone.
Analysts at Vetiva Capital said FCMB’s non-interest revenue (NIR) also fell 6% year on year to ₦10.2 billion, amidst 83% decline in income from T-Bills trading, which then offset gains made in FGN bonds and FX trading, which grew 92% and 124% respectively.
Vetiva said the decline in T-bills earnings across both interest and non-interest income lines is directly linked to the low yield environment in the fixed income space, most especially on short-dated papers which have been yielding negative real returns since Q2 of last year.
However, it was more positive on the expenses side, as the bank reported a tame 2% year-on-year increase in operating expenses to ₦25.4 billion, despite a 27% rise in AMCON charges, the biggest year on year growth.
On a positive note, FCMB’s impairments dropped 51% to ₦1.8 billion, thanks to a 16% decline in net impairments on loans and a 37% increase in write-backs on previously written-off provisions.
In the first three months, the bank declared a pretax profit of ₦4.2 billion, translated to a 22% year-on-year drop and after tax profit of ₦3.6 billion – representing a 24% drop when compared with the comparable period in 2020.
Vetiva Cut 2021 projection amid weaker NIMs forecast
Supporting lower earnings expectation projection, Vetiva Capital stated that despite reporting a 22% decline in interest expense to ₦11.8 billion, FCMB’s net interest margin (NIM) shrank 43 basis points to 6.9% from 7.3% in the financial year 2020.
However, analysts said it is important to reiterate that the decline in interest income was solely due to weaker yields on investment securities – income from loans and advances actually increased 12%.
“With short-dated securities likely to continue to return low yields in the medium term, we expect this to negatively impact the bank’s net interest margin for the rest of the year”, analysts said.
Therefore, Vetiva Capital forecasted 7.0% net interest margin for 2021, and net interest income of ₦84.9 billion , more than 13% drop when compare with ₦97.9 billion previously expected.
“Whilst we do expect the bank to continue booking FX revaluation gains, we believe the weak return on securities trading is likely to persist for majority of the year”, Vetiva Capita said.
As a result of the weak outlook, analysts said they lower forecast of non-interest revenue by about 7% to ₦48.9 billion from ₦52.3 billion.
Conversely, as the Nigerian economy continues to recover through the year, analysts expressed view that the bank will report further write-backs on loan losses.
“So, we lower our impairment projection to ₦12.8 billion from ₦18.3 billion”, Vetiva Capital stated.
The firm added that these adjustments give a new pretax profit projection of ₦19.7 billion, representing about 35% drop against ₦30.3 billion previously estimated by the firm.
Also, profit after tax for the year is projected to come at ₦16.9 billion, which is about ₦10 billion below initial expectation of ₦26 billion.
FX Devaluation Gain Pushed Earnings in 2020
In the financial year 2020 result, FCMB recorded gain due to its long dollar position as analyst at Meristem Securities said in a report that FX revaluation gave a push to earnings.
Meristem Securities said FCMB Group Plc. 10.04% gross earnings growth was supported by both interest income and non-interest income.
Analysis of the number showed that interest income was mainly driven by the 12.16% year on year improvement in interest on customer loans, as well as 12.27% rise in income on investment securities, which jointly constitute over 90% of total interest income.
Meristem said the sharp growth in interest income came as a surprise but Management attributed it to translation gains arising from the impact of FX devaluation on interest from dollar instruments, as well as interest income from investment securities bought in 2019.
This was a period when interest rates were relatively higher but earnings have been exposed to downside risks due to lower interest environment. Like other banks, this has reduce margin on loans, a pressure point for the lender.
Explaining how FCMB performed, analysts said major drivers of non-interest income were fees-related income from increased customer usage of digital banking channels, and gains from revaluation of USD denominated assets due to Naira devaluation during the year.
Meristem Securities then added that in 2021, the bank’s digitalization of SME lending should support loan growth which will ultimately bode well for interest income.
“And while Management has not provided guidance on the possibility of loan repricing, we do expect that interest income will at least benefit from the uptick in the yield environment. We do not anticipate that FX gains will be as significant in 2021, a view shared by the management”, Meristem Securities said.
Furthermore, investment analysts stated that FCMB’s trading gains are expected to moderate on the back of rising yield investment securities.
Notwithstanding the 29.57% year on year growth in interest bearing liabilities, the group’s cost of fund dipped by 112 basis points, which analysts attributed to regulatory reduction of interest rate on savings deposits.
Meanwhile, FCMB recorded an increase in low-cost deposits to 77.79% of total customer deposits from 69.79% in financial year 2019.
In 2020, FCMB asset yield (how much income assets are bringing into the company) improved to 11.65% from 10.41% in 2019 due to factors cited earlier while net interest margin (NIM) rose by 149 basis point to 8.10%.
Elsewhere, analysts said while operating expenses increased by 9.68% year on year on the back of inflationary pressures, IT related expenses, regulatory overheads, and COVID-19 donations, cost-to-income ratio improved by 381.28 basis points.
The improvement in the group cost to income ratio was on account of a 16.06% increase in operating income. Overall, FCMB profit after tax jumped 13.11% above the 2019 record to ₦19.61 billion despite a sharp uptick in impairment charges booked.
Amidst the apex bank forbearance granted for banks due to covid-19 induced pressure, FCMB reported 62.27% year on year increase in impairment charges in the period.
Analysts at Meristem Securities said the continued accumulation of cheaper funding should further suppress cost of funds. This, together with the uptrend in investment yield, is expected to support growth in net interest margin.
“We expect relatively modest impairment charges in 2021 owing to an improved business environment”, Meristem Securities stated.
Analysts at the investment firm expect FCMB’s profit after tax for 2021 to rise 8.08% to ₦21.19 billion.
Asset Quality Resilient Despite Higher Default Risks
Analysts believe the group asset quality came strong despite higher default rates in 2020. Last year’s result showed that FCMB’s gross loan book expanded by 15.23% to ₦869.28 billion.
However, 29.60% of this increase was triggered by Naira devaluation during the year as there was no actual loan disbursements.
Meristem said the management explained that the devaluation, coupled with past due obligation from an oil and gas loan led to 3.40% increase in the group’s non-performing loans in the period.
“We observed an overall improvement in asset quality as NPL ratio declined to 3.29% from 3.67% in 2019. Other prudential ratios are comfortably above regulatory minimum”, analysts said.