EUR 4.00 For Business Accounts Only

FCMB Group Plc H1 2020 - Modest result, seems fairly valued

• FCMB Group Plc maintained a steady growth in H1 20. The bank recorded a PBT and PAT growth of 25.6% and 28.8% YoY respectively. The growth in earnings stemmed from increase in interest income, a decline in interest expense and modest growth in Non-interest-revenue.
• Over H1, FCMB recorded a 8.2% YoY expansion in interest income following higher interest income on investment securities and interest on loans to customers. On the other hand, mirroring a lower rate environment and improved CASA mix (H1 2020: 77.3%, FY 19: 73.7%), interest expense on deposits moderated by 17% YoY. This, together with a decline in interest expense on onlending facilities drove total interest expense lower by 3.0% YoY. As a result, Net Interest Income expanded by 17.4% YoY to N45.4 billion and related margin (NIM) expanded 60 bps YoY to 8.0%. Meanwhile, Non-interest revenue rose 13.9% YoY to N17.5 billion mirroring higher FX revaluation gain (+240% YoY to N3.3 billion) and trading income (+10.9% YoY to N3.9 billion).
• Although, NPL ratio moderated to 3.5% over Q2 20 (FY 19: 3.7%), the impact of the covid-19 on several sectors led to increased impairment charge (+41% YoY to N7.7 billion). Meanwhile, we believe the reduction in NPL despite economic disruptions was as a result of the loan restructuring which currently stands at about 29% of total loans.
• As expected, the Q2 standalone result showed a slower growth. Precisely, both PBT and PAT expanded by only 3.7% QoQ and 5.4% QoQ respectively. Despite expansion in NIR (+3.7% QoQ) and improvement in opex (-5% QoQ), lower NII and higher loan loss provisioning (+11% QoQ to N4 billion) dragged overall earnings. Net Interest Income declined by 3.7% QoQ driven by a 1.4% QoQ moderation in interest income and a rise in interest expense by 2.2% QoQ. On the former, the impact of lower rates and covid-19 induced forbearance on credit facilities weighed on interest income on customer loans (-1% QoQ) and interest income on investment securities (-5% QoQ).
• Overall, ROAE remained in single digits (H1 20: 9.4%, H1 19: 8.2%). Capital adequacy ratio improved, printing at 17.3% (H1 19: 16.3%) above regulatory limit of 15%. Loan to funding currently at 52.6% remains below the benchmark of 65% despite expanding its loan book by 11% YTD. Notably, we saw a sizeable jump in restricted reserve deposits (+102% YTD) which we believe is not unrelated to FCMB’s inability to meet the 65% LDR requirements fused with CBN’s need to manage liquidity as well as increase in CRR to 27.5% (previously 22.5%). 

In a period of tightened regulations and margins, we had mentioned the possibility of banks venturing into other fast growing and more profitable sectors such as asset management in a bid to support earnings. Some weeks back, FCMB Group announced a planned acquisition of AIICO Pension. This is coming after it increased its stake in Legacy Pensions to 92%. We have thus updated our model to reflect the proposed acquisition which is expected to be completed by Q3 2020. Based on AIICO’s current AUM (N120 billion), we see the merged entity’s AUM expanding to N597 billion by the end of 2021. In addition, we expect the investment management business of FCMB Group to contribute circa 10% to the group’s PBT by 2021 (currently 8.9%). Aside these, we have left our other estimates unchanged. Our adjustment takes the FVE to N1.81/share (previously N1.79/share). With current market price of N1.90, we believe the stock is fairly valued and thus, recommend a SELL.

 

On a YTD basis, net loans expanded by 11%.

Principal moratorium and extension of loan tenures