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Initial View - FCMB Group Plc 9M 2018 - FX Revaluation gain provides Golden Touch

• Late yesterday, First City Monument Bank (FCMB) released its long-awaited 9M result which came in with few surprises; i) Non Interest Revenue (NIR) far exceeded our expectation (95% of our FY 18 estimate) as a result of a sharp jump in FX revaluation gains (9x YoY to N10.4 billion) and ii) the bank availed the gains recorded in NIR to book a higher than expected impairment charge (+15.6% YoY to N14.6 billion) over the period with annualized cost of risk printing at 3.2% (+67 bps YoY).  Nonetheless, the duo impact of lower interest expense (-9% YoY to N42.2 billion) and strong NIR (+76.4% YoY to N33 billion) drove earnings higher by 107.4% YoY to N0.57/share. ROAE and ROAA printed at 3.4% and 1.0% respectively, an increase of 133bps and 44 bps relative to 9M 17.
• Over 9M 18, FCMB recorded a 7% YoY growth in Net Interest Income (NIM) driven by a faster decline in interest expense (-9% YoY) which more than offset the weak outing on the interest income line (-1% YoY)  – due to a decline in interest income on loans to customers (+7.1% YoY), reflective of the 8.2% YoY drop in loans and advances over the year. On interest expense, the gains stemmed largely from a faster decline in on-lending facilities (-84% YoY to N316 million) – following a N1.1 billion reversal on interest paid over Q3, a development we will be seeking clarity from management – with overall 9M 18 cost of funds contracting 102bps YoY to 5.8%.
• A surprise packed Q3: As mentioned earlier, FCMB posted a strong FX revaluation gain of N9.0 billion (21x QoQ) over Q3 18. We believe this is as a result of gains on the bank’s FCY assets using average traded NIFEX rate of N361/$1 over Q3 18 relative to N344/$1 over Q2 18. However, we are stunned at the enormous amount booked given the relatively small size of the bank’s net long dollar position which stood at ~$200 million as at FY 17. Gains on this front combined with N4.9 billion (+4.8% QoQ) from E-Business income drove NIR higher by 95% QoQ to N16.5 billion.
• Funding cost (-56 bps QoQ to 5.3%) extended its descent for the fourth consecutive quarter on the back of lower on-lending expense. FCMB booked a reversal of N1.1 billion on interest expense paid on its on-lending facilities over Q3, which resulted in a 7% QoQ decline in interest expense. On the other hand, interest income declined 1.7% QoQ – with related assets yield contracting 61bps QoQ to 11.4% – due to lower interest income on investment securities (-18.6% QoQ to N6.3 billion), which more than offset the gains on interest income on customers’ loan (+3.3% QoQ to N24.4 billion). On balance, Net Interest Income (NII) advanced 2.6% QoQ to N17.9 billion, with a 30bps QoQ decline in NIM to 7.7%.
• Another element of surprise that popped up was a 200% QoQ jump in impairment charge (N7.3 billion) with Cost of Risk expanding by 320 bps QoQ to 4.8%. We believe the bank took advantage of the sizable FX revaluation gains to book the higher impairment charge over the period. Notably, the jump in provisioning over Q3 18, stemmed from an additional N3.7 billion impairment on other financial assets due to a net remeasurement of loss allowance, a development that was further magnified by the lower reversal on loan provisioning (Q3: N384 million vs. Q2: N2.2 billion). Overall, the net impact of lower funding cost and strong NIR number boosted profitability over the quarter with Profit after Tax expanding 78.9% QoQ to N5.6 billion.
• What are the Implications?  FCMB result was quite impressive and we believe the bank is on track to post a solid FY 18 result. As a matter of fact, EPS as at 9M 18 is N0.57 and already gaps our FY 18E of N0.55 largely owing to the strong FX revaluation gain. That said, we will be seeking clarity from management concerning its Non-Performing Loan (NPL) and a possibility of further provisioning given the sizable amount booked over Q3 18 especially on other financial assets. Also, we will be getting some guidance concerning the bank’s funding cost and the nature of the transaction involving the reversal of prior quarters on-lending interest expense. Lastly, we will get more understanding concerning the surprise jump in its FX revaluation gains.
• The stock is trading at a P/B of 0.14x, a discount to average P/B (0.15x) of Fidelity  (0.28x) and Diamond  (0.07x). Our last communicated FVE on FCMB is N2.34 which translates to a BUY rating on the stock. We will revisit our numbers after further analysis and discussion with management.
• The bank will be holding a teleconference call on Wednesday, December 5, 2018 at 3:30 pm Lagos Time (2:30pm London/ 4:30pm Johannesburg/ 9:30am New York) with its senior management. Click for details.

 

The bank result was audited while the group wasn’t audited