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CORR: FCMB PLC-PAT lags estimates as loan loss expense sinks earnings

Coming off a strong H1’16 performance, FCMB reported relatively weak 9M’16 earnings as a sharp rise in loan loss provision overshadowed the decent top line performance. Although 9M’16 PAT rose significantly to ₦13.0 billion (9M’15: ₦1.9 billion), the line came in lower compared to H1’16: ₦15.7 billion. In line with the trend observed across the industry (particularly in Q3), FCMB recorded a loan loss expense of ₦34.5 billion for the 9M period (Vetiva estimate: ₦18.5 billion), with a significant ₦21.0 billion of the expense line coming in Q3. Whilst loan loss expense came as the most substantial pressure point in Q3’16, we note that earnings were weaker q/q across all key line items (save for Interest Income which rose by a mild 2%). Notably, Interest Expenses raced north, up 27% q/q as the impact of the higher interest rate environment took its toll. Whilst Operating Expense came in mildly higher q/q (up 2%), the expense line remained contained y/y – just in line with our ₦49.3 billion estimate. Overall, bottom line came in at ₦2.7 billion loss in Q3’16, dragging 9M’16 earnings to ₦13.0 billion – behind Vetiva (₦17.8 billion) and Consensus (₦14.6 billion) estimates.

Whilst H1’16 performance came in better than consensus estimate, we had earlier highlighted that the impressive FX gains recorded in Q2 masked the significantly higher loan loss expense reported within that quarter. Hence, with a less volatile FX market in Q3, the impact of the weak asset quality on earnings became more obvious. Given that there has been no significant improvement in the risk environment within Q4, we expect loan loss expense to remain high. We have updated our model to reflect the major deviations from our estimates. Although we raise our FY’16 Non-Interest Income estimate to ₦51.5 billion (Previous: ₦42.7 billion), we remain cautious as we expect a slower run rate in Q4’16. Also, we raise our FY’16 loan loss estimate to ₦44.6 billion (Previous: ₦24.7 billion) – translating to a CoR of 7.0% (9M’16: 7.4%). We maintain our 15% FY’16 loan growth forecast and cut our deposit growth forecast to -5% (Previous: 2%). Overall, we revise our PAT forecast to ₦17.3 billion (Previous: ₦23.7 billion) – translating to FY’16 EPS of ₦0.87. Given that the banking subsidiary’s 9M’16 numbers are audited, the earnings supported CAR amidst a relatively flat loan book, up to 17.6% (H1’16: 16.1%).