FCMB GROUP PLC H1'19 - Gross earnings beat estimates on interest income growth

Gross earnings beat estimates on interest income growth                                                          

FCMB released its H1’19 results, posting a 7.0% y/y growth in Gross Earnings to ₦89.8 billion, slightly ahead of our estimate of ₦88.5 billion. This was due to strong y/y growth in Net Interest Income (+9.6%), which beat our estimate, coming in at ₦38.7 billion. The stronger than expected growth was a result of a 235% y/y jump in Interest on cash and cash equivalents, which complimented the slight (+3.1%) growth in Interest on loans and advances. Meanwhile, Non-interest income, which we expected to increase substantially y/y, declined 1.1% to ₦19.4 billion and fell 12.3% below our estimate (₦22.1 billion). This was mainly due to declines in Service Fees and Commissions (-7.3% y/y) and a steep drop in Foreign Exchange trading income (-94.8% y/y). Rising at a slower pace than Interest Income, Interest Expense grew 9.2% y/y to ₦31.7 billion for H1’19, in line with our estimate. Loan loss provisions also improved significantly y/y as expected, with a 25.0% moderation to ₦5.5 billion in H1’19, mildly below our ₦5.7 billion estimate. However, Operating Expenses grew 8.2% y/y to ₦43.7 billion, 2.3% higher than our estimate, occasioned by higher staff costs (+16.2% y/y to ₦14.0 billion) and IT Expenses (+12.2% y/y to ₦2.2 billion).                                                          

Following a moderation in loan portfolio in Q2’19, we adjust our loan growth forecast for 2019 and estimate a 2.0% growth in Loans and Advances (Previous: 5.0%). With this, we revise our Gross Earnings expectation marginally lower to ₦192.1 billion. We note that FCMB will remain compliant with CBN’s LDR regulation, as current LDR stands at 75.1%. As Fees and Commission Income has underperformed in the past two quarters, we have revised our estimate on Other Income lower to ₦46.7 billion (Previous: ₦48.1 billion). Therefore, we revise our PBT estimate for FY’19 to ₦20.8 billion (Previous: ₦22.2 billion) and our PAT figure to ₦16.9 billion (Previous: ₦18.0 billion). After this, our dividend per share expectation for FY’19 has been adjusted to ₦0.17 (Previous: ₦0.18). Therefore, we revise our target price lower to ₦3.19 (Previous ₦3.44). With forward P/E of 1.9x and P/B of 0.2x, with an expected dividend yield of 10.6%, FCMB represents notable value in the Tier II banking space.