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FCMB GROUP PLC - A strong Q2 despite huge loan loss expense

FCMB reported strong topline growth in H1’16 – beating our modest estimate (following a significantly weak Q1 performance). The impressive Gross Earnings growth (up 57% q/q and 28% ahead of our estimate) was supported by significant improvements in Non-Interest Income, up to N20.9 billion in Q2’16 (vs. Q1’16: N5.1 billion). In line with the trend observed across most banks in Q2, Non-Interest Income was spurred by strong FX gains – accounting for 77% of the income line in Q2’16. Furthermore, in line with relatively higher interest rate environment in Q2’16 (yield level 250bps higher on average), both Interest Income and Expense rose 12% q/q, resulting in a 19% q/q rise in Net Interest Income. The strong topline performance was however tapered mildly as the bank reported a N10.0 billion loan loss provision in Q2’16 vs. Q1’16: N3.5 billion and Vetiva estimate of N3.1 billion. Despite the significantly higher provisioning, Operating Income rose 13% y/y and 62% q/q (25% ahead of our estimate). Amidst a well contained Operating Expense (down 3% y/y and 2% better than our estimate), PBT rose 70% y/y to N16.3 billion – beating our N5.9 billion estimate. More so, with an effective tax rate of 4% vs. prior year’s 13% and our 16% forecast, PAT rose to N15.7 billion (H1’15: N8.3 billion) – significantly ahead of Vetiva and Consensus estimates of N4.9 billion and N4.1 billion respectively.

We have updated our model to reflect the major deviations from our Non-Interest Income and loan loss provision estimates. Whilst we raise our FY’16 Non-Interest Income estimate to N42.7 billion (supported by the traction gained in Q2 - N20.9 billion), we remain cautious as we expect a slower run rate in H2’16. Also, with consistent pressure on loan performance, we raise our FY’16 loan loss estimate to N24.7 billion (Previous: N13.3 billion) – translating to a CoR of 3.9% (H1’16: 4.3%). Following the impact of currency devaluation on loan portfolio, we revise our FY’16 loan growth forecast to a 15% (Previous: 4% decline). Overall, we anticipate PAT of N23.7 billion – translating to FY’16 EPS of N1.20. FCMB trades at a 2016E P/E and P/B of 1.2x and 0.2x compared to our coverage banks’ averages of 3.3x and 0.5x respectively.