Wednesday, August05, 2020 / 09:08 AM / FBNQuest Research / Header Image Credit: First City Monument Bank

20% increase to our price target

Following FCMB's Q2 earnings which surprised positively, we haveincreased our new price target by 20% to N3.42; this implies a potential upsideof c.77% from current levels. In addition to the positive surprise on bothrevenue lines, earnings received a boost from a positive result of N6.8bn inother comprehensive income (OCI). As such, we have upgraded our 2020E EPSforecast by c.56%. However, the upward revision to our 2021E EPS forecast ismodest at 5%.

Thanks to the regulatory forbearance on loan restructurings, cost ofrisk remained relatively stable q/q at c.2.0%. Management disclosed that about40% of its loan book - mostly oil and gas (c.17%) and manufacturing (7%) - isbeing restructured. Looking ahead, management sees a brighter outlook forcredit performance on the back of the gradual pick-up in economic activityfollowing the lifting of the lockdown. Despite the magnitude of restructuring,we believe that the market's current valuation of the stock - 2020E P/Bmultiple of 0.17x (for 2021E ROAE of 8.8%) - is too bearish and is at asignificant discount (64%) to the 0.48x (for 16.3% ROAE) that our universe ofbank stocks is trading on.

Although the 0.31x 2020E P/B multiple implied by our price target ishigher than what the market is valuing the stock on, it is still at a lowerdiscount of c.36% to the sector. Despite the sizable upside potential impliedby our price target, we retain our Neutral rating because of (i) potentialdownside risks by way of asset quality deterioration and a possible rise incredit impairments given the sizable proportion of loans being restructured,and (ii) weaker liquidity buffers relative to peers - liquidity ratio of 32.2vs regulatory minimum of 30%.

Q2 PAT up strongly y/y, driven by solid growth inrevenues & OCI

FCMB'spre-provision profits advanced by 13% y/y, driven by growth of 11% y/y and 16%y/y in funding and non-interest income respectively. While the y/yimprovement  in funding income was driven by a 60bp y/y expansion in netinterest margin to 8.0% (H1 2020), the double-digit growth in other income wasunderpinned by an fx gain of N1.9bn (vsN488m in Q2 2019) and a 48% y/y increasein trading income (mainly bonds and fx).

On theback of these, PBT expanded by 25% y/y. Also, PAT accelerated by 209% y/y,thanks to the OCI. Sequentially, PBT grew modestly by 4% q/q. PAT was up bytriple digits, because of the robust performance on the OCI line.

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