FCMB GROUP PLC 9M'17 - Earnings miss but investment in Legacy provides optimism
FCMB released its 9M’17 result, reporting weaker than expected performances across major line items with PAT down 58% y/y to ₦5.5 billion – missing our ₦6.7 billion estimate. Notably, whilst Interest Income (₦96.3 billion) came in marginally ahead of our ₦94.0 billion estimate and up 3% y/y, significantly weaker Non-Interest Income (down 58% y/y) constrained Gross Earnings to a 16% y/y decline. Non-Interest Income moderated to ₦18.7 billion – lagging our ₦20.7 billion estimate. However, beating earlier run rate and coming in better than our ₦16.0 billion estimate, loan loss provision moderated significantly to ₦12.7 billion (9M’16: ₦34.5 billion) as improvement in the macroeconomic environment continues to support asset quality. Higher funding cost however remained the notable pressure point with Interest Expense up 16% y/y to ₦46.4 billion (Vetiva estimate: ₦42.9 billion) amidst the elevated interest rate environment.
We have revised our estimates across most line items to reflect the earnings miss. Particularly, we cut our loan loss provision estimate for FY’17 to ₦16.9 billion (Previous: ₦21.3 billion) following improvements observed in Q3’17. We expect higher Interest cost burden to continue to weigh on earnings amidst the uptick in cost of funds and raise our Interest Expense estimate to ₦65.9 billion (Previous: ₦63.8 billion). We recall that FCMB acquired additional 60% interest in Legacy Pensions Managers Limited last week, taking its stake in the firm to a controlling holding of 88.2%. We expect the acquisition to further enhance the Group’s diversification strategy and support profitability going forward. With this, despite the significant deviation from the Non-Interest Income line, we revise our Non-Interest Income estimate to ₦28.6 billion (Previous: ₦27.6 billion). Overall, we revise our PAT estimate for FY’17 to ₦11.1 billion (Previous: ₦9.0 billion) and raise our Target Price to ₦3.23 (Previous: ₦2.92).
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