Cost of risk to weigh on 2018E earnings
- Material cuts to our 2018E earnings forecasts and price target: Although FCMB Group’s (FCMB) Q4 2017 PBT surprised positively relative to our estimates, we have cut our 2018E EPS forecast by 36% and our price target by a similar margin to N1.51. Following the adoption of IFRS 9 this year, management sees cost of risk moving up to 3.0-4.0% (from c.3% in 2017) and a 100-150bp reduction in CAR. Consequently, the material reductions to our earnings forecasts are underpinned by a 67bp increase in our cost-of-risk assumption to 3.4%. Similar to other banks which have reported their 2018 results, FCMB took a charge of N2.3bn or a 50% specific impairment on its 9mobile exposure. The bank also took an impairment charge of N2.8bn for a specific name in the oil and gas services sector. Our new forecasts imply a 2018E ROAE forecast of 3.9% – broadly in line with management’s single-digit ROE guidance. Having significantly outperformed the NSE ASI year-to-date with a 59% gain (vs. 7% NSE ASI), our new price target implies a potential downside of -36% from current levels. Although the shares are trading on a 2018E P/B multiple of 0.2x or a significant discount to the 0.9x average multiple that our universe of bank stocks is trading on, its earnings profile (6.4% ROAE in 2019 vs. 15.7% ROAE for the sector) is less compelling than that of the sector. Consequently, we retain our Underperform rating on the stock.
- Q4 PBT up 123% y/y driven by solid growth in non-interest income: FCMB’s Q4 2017 PBT showed a remarkable growth of 123% y/y to N4.6bn. The marked growth in PBT was underpinned by a 76% y/y growth in pre-provision profit. The strong double-digit growth on this line completely offset a significant spike (+877% y/y) in loan loss provisions and an 18% y/y rise in opex. Although both revenue lines contributed to the strong growth in pre-provision profits, non-interest income which grew by 356% y/y was the major driver. Funding income also advanced by 26% y/y. Moving below the P&L, the growth in PAT came in at 38% y/y because of a -40% y/y reduction in other comprehensive income (OCI). Sequentially, PBT grew by 53% q/q. Similar to the y/y trends, the strong q/q growth on both revenue lines was the key driver. Compared with our forecasts, PBT and PAT beat by 18% and 57% respectively, largely because of positive surprises in non-interest income and funding income.