FCMB Group PLC: Remarkable performance brightens record despite harsh operating terrain

BASED UPON THE BANK’S FLEXIBILITY TO THE CURRENT REGULATORY POLICIES AND THE MACROECONOMIC HEADWIND, WE BELIEVE THAT THE BANK’S MANAGEMENT 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 full year, 31st December, 2016 financial result indicate a substantial growth of 15.63% in topline earnings to N176.35 billion and bottom-line earnings growth of 201.19% 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.

TRADING INCOME DRIVES GROWTH IN TOP-LINE EARNINGS

Gross earnings for the 12 month period ended, 31st December 2016 grew by 15.63% to N176.35 billion from N152.51 billion reported in the same period 2015. Gross earnings growth was impacted by a 77.16% upsurge in non-interest income on the back of an extra-ordinary 504.82% increase in net trading income largely driven foreign exchange income to N5.69 billion from N940m during the period under review. Interest income on the other hand, rose by a modest 1.23% to N125.11 billion from N123.58 recorded at the corresponding period end of 2015. This stemmed from decline in customers deposit by 6.08% which impacts on advances. Interest expense for the period declined by 6.83% to N55.58 billion from N59.65 billion reported in December 2015. Hence, an 8.75% rise in net interest income to N69.53 billion from N63.94 billion over the period under review. Fees and commission income declined by 6.92% to N17.68 billion in December 2016 from N19 billion a year ago, while fees and commission expense increased notably by 10.66% to N3.51 billion from N3.16 billion over the same period. Due to decline in fees and commission income and rise in its expense, net fee and commission income decreased to N14.18 billion in December 2016 from N15.83 billion in December 2015; reflecting a change of 10.44%.

OPERATING INCOME AND TAXATION POSITIVELY IMPACTS PROFITABILITY

Total operating expenses increased by 23.51% to N101.30 billion in December 2016 from N82.01 billion in December 2015 primarily due to a massive growth of 136.29% in net impairment loss on financial assets to N35.52 billion from N15.03 billion recorded in December 2015. Therefore, operating profit increased significantly by 107.94% to N15.98 billion in December from N7.68 billion a year ago. Pre-tax profit for the period grew massively by 109.19% to N16.25 billion from N7.68 billion year on year attributable to a considerable rise of 222.53% in income from investment in associates to N272m from N85m in the corresponding period of 2015. Expectedly, profit after tax followed suit with a remarkable 201.19% increment to N14.34 billion in full year ended, 31st December, 2016 from N4.76 billion reported in the 12-month period of 2015. Also, the Bank’s impressive performance in the bottom line can be connected to substantial decline in income

ASSET QUALITY REMAINS RELATIVELY FLAT

The Bank’s balance sheet reflects steady progress in performance over the period. The Group’s total asset grew by modestly by 1.14% to N1.17 trillion as at December 2016 from N1.16 trillion as at December 2015. Notable changes in total assets includes: 359.01% in nonpledged trading assets to N9.15 billion from N1.99 billion, 5.08% negative change in investment securities to N128.44 billion from N135.31 billion, 22.69% decline in other assets to N16.78 billion from N21.70 billion and advances to customers rose by 11.30% as at 31st December, 2016. On the other hand, total liabilities decline by a negligible 0.32% to N993.91 billion as at December 2016 from N997.14 billion as at December 2015. Bank total deposits from customers and other banks shrank by 3.30% to N682.41 billion as at December 2016 from N705.68 billion as at December 2015; borrowings grew by 16.18% to N132.09 billion from N113.70 billion year on year. However, shareholder’s equity increased by 10.15% to N178.87 billion as at December 2016 from N162.39 billion as at 31st December 2015 due to retained earnings growth of 88.91%.

CAPITAL AND LIQUIDITY RATIOS ABOVE REGULATORY REQUIREMENTS

FCMB’s liquidity ratio stood at 31.2% as at December 31st, 2016 which is well above the minimum regulatory requirement of 30%. The Group’s Return on Average Equity (ROAE) stood at 8.40% as at December 2016 while Return on Average Assets (ROAA) stood at 1.23% over the same period. The Group’s cost-to-income ratio at 56.1% while Net interest margin (NIM) grew settles at 8.4% in December 2016 from 8.1% in December 2015 while pre-tax profit margin and net income margin notably to 9.22% from 5.09% and to 8.13% from 3.12% respectively.

WE RECOMMEND A BUY

The macro-economic headwinds of 2016 saw inflation grow steadily to a peak 18.6% in December, MPR at 14% and CRR maintained on all public sector deposits to 22.50% in November 2016. Nevertheless, FCMB delivered an impressive performance despite these harsh business environment and unstable monetary policies caused by the impact of naira devaluation, foreign exchange scarcity, rising commodity prices and the fuel price hike. Based upon the Bank’s flexibility to the current regulatory policies and the macro-economic headwind, we believe that the Bank’s management adjustment plans that focus its effort towards an efficient performance which strengthens earnings, income generation capacity and growth in liquidity base. With strategic innovation and execution the bank will enhance its deposit balance and advances leading to an better improved interest income and income from fees and commission. Furthermore, in line with its on-going 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, we cautiously make full year, December 2017 projection of N209.37 billion for gross earnings and N20.46 billion for net income. Using the Price to Earnings (PE) multiple of 1.38x, our valuation leads to a forward EPS of N1.03, and a 6-month average target price of N1.67. Since this represents an upside potential of 42.66% on the current stock price of N1.17, we therefore recommend a BUY.