Friday, December04, 2020 / 09:33 AM / by FBNQuest Research / Header Image Credit: Ecographics

Materialincrease to price target due to cut to risk-free rate

FCMB'sQ3 '20 PBT grew strongly y/y and came in c.5% higher than our forecast.However, PAT missed by a wide margin because of a negative result of c.-NGN4bnin other comprehensive income (OCI). On its conference call, managementdisclosed that c. NGN2.2bn of fx revaluation gains will be recognized in its Q4 '20 results. Having made allowances for these gains, our '20f non-interestincome forecast is c. 6% higher. As such, the -6% reduction to our '20f EPSforecast does not fully reflect the extent of the earnings miss relative to ourforecast. FCMB'sROAE has been range-bound between low single-digits and 10% since 2015.

Our '20f forecasts imply an ROAE of 10.7%, consistent with its 5-year historicalROAE trend. The bank's returns profile has been constrained by an elevatedcost-to-income ratio in the mid-to-high 60% range, and historically highcost-of-risk of >2%. More recently, its liquidity buffers have come undersevere strain (Q3 '20 liquidity ratio of 33.5% vs 30% regulatory minimum) dueto discretionary debits for CRR by the CBN. However, the bank's liquidityposition is likely to be strengthened by the CBN's recent move to securitizebanks' excess cash reserve via its special bills.

Althoughstill below the regulatory minimum, FCMB's asset quality (NPL) ratiodeteriorated by 90bps q/q to 4.4% due to a spike in NPLs for the oil & gasloan book. On a positive note, management indicated that it expects to receiveregulatory approval for its acquisition of AIICO Pensions before the end of theyear. Given FCMB Pensions' AUM size of c.NGN340bn, when concluded the AIICOmerger will take its total AUM to .c.NGN500bn and move it to number 7 from 9 onthe league table.

Despitethe downgrades to our earnings forecasts, our new price target of NGN4.96 is c.45% higher because we have lowered the risk-free rate driving our valuationmodel to 6% from 12.5% previously. Our new price target implies a potentialupside of 68% from current levels. Nevertheless, we keep our Neutral rating onthe shares because we see better upside within our coverage universe.

Q3PBT up 20% y/y driven by solid funding income growth and decline in opex

FCMB'sQ3 PBT was up 20% y/y to NGN4.8bn. The solid earnings growth was driven bypre-provision profit growth of 9% y/y and a 7% y/y reduction in opex. Thesepositives overshadowed a 138% y/y increase in impairments for credit losses.

Interms of revenue, funding income grew 30% thanks to the low interest rateenvironment which drove a reduction in funding cost, and a y/y expansion inearning on risk assets.  In contrast, non-interest income declined by 22%y/y because of a 58% y/y reduction in other income. PAT came in at NGN361m(-N1.0bn in 'Q3 2019).

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