FBNQuest FCMB Group Q1 2017 results review: Weak Q1 2017 driven by spike in provisions
Weak Q1 2017 driven by spike in provisions
· Retaining Neutral rating despite 19% cut to our price target: Following FCMB’s Q1 2017 results which came in well behind our forecasts, we have cut our EPS forecasts by around 15% on average over the 2017-18E period and our price target by 19% to N1.0.
The weaker-than-expected results were mainly due to a negative surprise in loan loss provisions. However, funding income which came in around 3% lower than our estimate also contributed. Management attributed the subdued funding income line to the high interest rate environment – significantly higher funding costs which more than offset the increase in yields on earnings assets.
Although non-interest income came in around 14% higher than our forecast, the positive surprise on this line was not enough to offset the spike in provisions and weakness in funding income.
The latter has led us to cut our funding income forecast for 2017E by 4%. When annualised, FCMB’s loan loss provisions imply a cost of risk of 3.0%, in line with management’s guidance for the full year. Consequently, we have retained the cost of risk assumption driving our model at 3.0%.
These changes underpin the -56% y/y EPS decline that we forecast for 2017E. Having shed -23.1% in the last one month compared with a +3.4% return on the NSE ASI, our new price target provides a potential upside of 9% from current levels. As such, we retain our Neutral recommendation on the stock.
· PBT down 10% y/y; missed our forecast by 34%: FCMB’s Q1 2017 results showed that although PBT declined by 10% y/y to N2.0bn, PAT grew by 405% y/y to N2.1bn. The key driver behind the marked growth in PAT was a positive result of N537m on the other comprehensive income (OCI) line compared with a loss of –N1.2bn in Q1 2016. Further up the P&L, pre-provision profits grew modestly by 4% y/y.
However, a 40% y/y rise in loan loss provisions proved significant and completely offset the modest growth in pre-provision profits.
Apart from the spike in provisions, the decline in PBT was also underpinned by a 9% reduction in funding income. In contrast, non-interest income grew by 49% y/y. Sequentially, PBT declined by 4% q/q.
Again, funding income which declined by 5% q/q and provision for loan losses which was up by 384% q/q were the key drivers behind the reduction in PBT on a q/q basis. Compared with our forecasts, PBT and PAT missed by 34% and 17% respectively, mainly due to negative surprises in provision for loan losses and funding income.