FCMB Group PLC: Remarkable performance despite macro-economic headwind

BASED UPON THE BANK’S FLEXIBILITY TO THE CURRENT REGULATORY POLICIES AND THE MACROECONOMIC HEADWIND, WE BELIEVE THAT THE BANK’S MANAGEMENT IS EXECUTING ADJUSTMENT PLANS THAT FOCUS ITS EFFORT TOWARDS AN EFFICIENT PERFORMANCE WHICH STRENGTHENS EARNINGS, INCOME GENERATION CAPACITY AND GROWTH IN LIQUIDITY BASE

First City Monument Bank Plc (FCMB) in its reported third quarter, September 2016 financial result recorded a growth of 28.89% in top-line earnings to N140.25 billion from N108.81 billion in the corresponding period of 2015. However, bottom-line earnings rose substantially on the back of considerable increase in other income.

The Bank which listed on the Nigerian Stock Exchange in 2004 and issued her first public offering (IPO) in 2005 now has a record of 2 million customer base, over 270 branches in Nigeria and a licensed banking subsidiary in the United Kingdom (FCMB UK). First City Monument Bank Limited has continued its strive towards enhanced customer experience through innovation acceleration, enhancement of performance and security boosting.

RISE IN TOP-LINE EARNINGS DESPITE TURBULENT BUSINESS TERRAIN

Gross earnings grew by 28.89% to N140.25 billion in the third quarter of 2016 from N108.81 billion reported in the same period 2015. Gross earnings growth was impacted by a 119.13% upsurge in non-interest income to N46.92 billion from N21.41 billion recorded over the same period in 2015. The increase was mainly driven by an extra-ordinary 612.1% increase in foreign exchange income to N35.34 billion from N4.96 billion during the period under review. Interest income on the other hand, rose marginally by 6.78% to N93.33 billion in the third quarter of 2016 from N87.40 during the same period of 2015.

Interest expense for the period grew by 3.50% to N40.04 billion from N38.69 billion reported in September 2015. Hence a remarkable 9.40% rise in net interest income to N53.29 billion from N48.71 billion over the period under review.

Fees and commission income decreased by 5.59% to N13.37 billion from N14.17 billion during the period under review, while fees and commission expense increased significantly by 18.57% to N2.69 billion from N2.27 billion over the same period. However, due a decline in fees and commission income and a rise a fees and commission expense, net fee and commission income decreased to N10.68 billion in September 2016 from N11.89 billion in September 2015; reflecting a change of 10.20%.

SIGNIFICANT CHANGES IN TOTAL OPERATING INCOME AND TAXATION IMPACTS PROFITABILITY

Total operating expenses increased by 27.44% to N83.82 billion in September 2016 from N65.78 billion in September 2015 primarily due to a massive growth of 125.65% in net impairment loss on financial assets to N34.49 billion from N15.29 billion recorded in September 2015.

Therefore, pre-tax profit for the period grew by a substantial 453.06% to N14.18 billion in September 2016 from N2.56 billion recorded in the third quarter of 2015 attributable to a massive 362.91% increase in other income to N33.55 billion recorded in the third quarter of 2016 from N7.25 billion in the corresponding period of 2015.

Expectedly, profit after tax followed suit with a massive 595.81% increment to N12.98 billion in third quarter of 2016 from N1.87 billion reported in the nine-month period of 2015. The Bank’s impressive performance may be connected to the massive decline in total income tax expense by 282.48% to a

STRONG ASSET QUALITY

The Bank’s balance sheet reflects steady progress in the bank’s performance over the period. The Group’s total asset grew by 7.06% to N1.24 trillion in September 2016 from N1.16 trillion from December 2015. The growth in total assets is attributable to the following: a massive rise of 439.27% in non-pledged trading assets to N10.75 billion from N1.99 billion, a rise of 18.31% in investment securities to N160.09 billion from N135.31 billion and a 22.04% increase in other assets to N26.49 billion from N21.70 billion during the period under review.

On the other hand, total liabilities rose by 6.96% to N1.06 trillion in September 2016 from N997.14 billion in December 2015. The rise in total liabilities is largely attributable to a massive rise of 770.09% in bank deposits to N47.52 billion in September 2016 from N5.46 billion in December 2015; borrowings also grew by 50.05% to N170.61 billion from N113.70 billion over the same period.

However, shareholder’s equity increased by 7.69% to N174.88 billion in September2016 from N162.39 billion in December 2015 due to growth of 95.59% in retained earnings.

CAPITAL AND LIQUIDITY RATIOS STILL ABOVE REGULATORY REQUIREMENTS

FCMB’s liquidity ratio stood at 36.8% as at September 30th, 2016 which is well above the minimum regulatory requirement of 30% while capital adequacy ratio stood at 17.6% which also remained well above the minimum statutory requirement of 10% for non-systematically important banks where FCMB belongs to. The Group’s Return on Average Equity (ROAE) stood at 10.4% as at September 2016 while Return on Average Assets (ROAA) stood at 1.4% over the same period.

The Group’s cost-to-income ratio declined to 50.3% compared to 73.9% recorded in the third quarter of 2016. Net interest margin (NIM) grew marginally to 8.4% in September2016 from 8.3% in September 2015 while pre-tax profit margin and net income margin notably to 10.11% from 2.36% and to 9.26% from 1.71% respectively.

WE RECOMMEND A BUY

The macro-economic headwinds of 2016 saw inflation rise to 18.48%, MPR at 14% and maintains of CRR on all public sector deposits to 22.50% in November 2016. Nevertheless, FCMB delivered an impressive performance despite harsh business environment and unstable monetary policies.

Based upon the Bank’s flexibility to the current regulatory policies and the macro-economic headwind, we believe that the Bank’s management is executing adjustment plans that focus its effort towards an efficient performance which strengthens earnings, income generation capacity and growth in liquidity base.

Furthermore, in line with its ongoing target to translate foreign exchange differentials to bear positively on the Bank’s business, maintaining its current level of NII and NIR despite a challenging macro-economic environment that is easing up as well as a good record of expenses management.

Based on the company’s performance, our valuation leads to a forward EPS of N0.81, and a 3-month average target price of N1.47. Since this represents an upside potential of 31.27% on the current stock price of N1.47, we therefore recommend a BUY.