First City Monument Bank Group Plc (“the Group” or “FCMB”) released its 9M: 2015 earnings result last Friday, 29th January, three months after its due date. The result was largely disappointing as gross earnings grew 2.4% to N109.3bn (weaker than our projection of 9.6%) while PBT fell 84.7% Y-o-Y to N2.6bn and annualized EPS settled at N0.49 relative to our FY:2015 projection of N1.05.
The deviation in top line growth relative to our forecast was due to the mild 4.1% Y-o-Y growth recorded in interest earning assets from N857.5bn in FY:2014 to N892.6bn in Q3:2015. Loans contracted 8.5% YTD to N568.3bn leading to constrained 3.0% growth in Interest income. Interest expense however grew faster by 9.3%, resulting in a higher cost of fund (5.6% from 5.2% in FY: 2014) and a 0.8% Y-o-Y decline in Net Interest Income to N48.7bn. Investment and other operating income also weakened by 4.1% to N19.6bn, which the Group’s management attributed to regulatory and macroeconomic headwinds which had led to a lull in capital market activities and pressured earnings performance of its investment banking unit (which contributed 5.6% to FY: 2014 PBT). We however attribute much of this to weaker income from FX transactions and lower COT regime affecting trading and commission revenue already exhibited in its H2:2015 result.
The significant drop in PBT was driven by impairment charges on the loan book (up 290.7% Y-o-Y to N15.3bn) of its commercial banking unit and a higher operating cost.
The impact of both weighed on the Group’s Cost of Risk (annualized) and Cost to Income ratios which rose to 3.7% (Vs. 1.7% in FY: 2014) and 71.5% (Vs 68.5% Q3:2014), also higher than our FY: 2015 forecasts of 1.7% and 66.0% respectively. The list of “bad debtors” released by the Group in August 2015 put cumulative toxic assets at N17.1bn with exposures ranging from downstream oil & gas, properties and construction & engineering. Whilst this may indicate a significant chunk of provisions have already been made, the increasing NPL ratio (which increased to 5.8% in 9M: 2015 from 3.6% in FY: 2014) and high exposure to upstream oil & gas and commerce sectors (27.8% of gross loan book as at H1:2015) signify a downside risk to future profitability.
12-Month TP Revised to N1.78 from N4.19, Retain a “BUY” Recommendation
We have lowered our FY: 2015 estimate of gross loan growth to -8.5% and the FY: 2016 loan growth projection to 3.0%. The Group in a loss warning issued last week suggested that Wholesale Banking related activities (which accounted for 64.0% of Gross loans in H1:2015) continued to witness pressure into Q4:2015, largely due to FX illiquidity and macro headwinds which we envisage would persist in 2016. We have also raised our Cost of Risk assumption to 3.0% (from 1.7%) for FY: 2015 (from 1.7%) and expect it to moderate to 2.1% in 2016. Although the Group’s Cost of Fund remains below Tier-2 average (5.7%), deposits have been declining while funding and operating expense ratios are up, thus we expect Net Interest Margin to moderate to 7.3% and 7.4% in 2015 and 2016 (from 8.0% in 2014) and Cost to Income Ratio to rise to 74.0% in 2015 and moderate to 72.2% in 2016.
Against this backdrop, we forecast PBT to decline 73.5% Y-o-Y to N6.3bn in FY: 2015 and have revised our 2016 PBT estimate to N13.9.bn (from N28.6bn). We expect 2015 EPS to settle at N0.27 and increase to N0.62 in 2016. We have also lowered our dividend expectation for the Group in 2015 due to lower earnings yield and impact of weaker asset quality on its capital buffers. The CBN recently increased provisioning cost for loans to 2.0% from 1.0%. Although the bank remains well-capitalized (with a CAR of 18.3% from 19.8% in H2:2015) above regulatory requirement of 15.0%, management would likely increase retention rate to stem the impact of the increase in regulatory risk reserve on its core Tier-1 capital.
Consequently, our bended valuation comprising Net Asset Value, Dividend Discount Model and Residual Income Model valued the stock at a fair price of N1.49 and a 12-Month Target Price of N1.78, implying a P/E and P/BV of 6.3x and 0.2x as against the current trailing P/E and P/BV of 2.0x and 0.1x respectively. This presents an 80.1% upside potential as the stock presently trades at N0.99. Hence, we have maintained a BUY recommendation on the stock.