Ladi Balogun GMD, FCMB

FCMB Group Plc has been handed ‘hold’ and ‘sell’ recommendation by a slew of analysts who have expressed uncertainties around lender’s earnings potential in the second half of 2020.

The Central Bank of Nigeria’s Cash Reserve ratio debits top the list of analysts concern over the lender’s future earnings.

Traded at ₦2.10 on Friday on the floor of the Nigerian Stock Exchange, investors think the financial service Group is worth ₦42.525 billion. Four different investment banking firms have downgraded FCMB Group Plc to hold, sell rating having noted that the financial service boutique earnings will come under some sorts of threats in the second half.

As a result of weak earnings outlook, analysts advised investors to neither buy nor sell FCMB stock in their portfolios, except for ARM Securities that recommend a sell. Also, United Capital which had earlier advised its customers to hold downgraded the financial service boutique to a sell. In the first half of 2020, FCMB’s earnings came stronger than expected, but analysts recognised that the Central Bank of Nigeria’s regulation will put a strain on its future earnings.

Specifically, Meristem said with CRR at 54%, the Group faces with liquidity risk, which may limit assets accretion. Between May and June, FCMB was debited twice by the regulator for failing to meet a 65% loan to deposits target.

Already, after a $50 million loans from the International Finance Corporation for on-lending to its SMEs customers, Mr Ladi Balogun, the Group Chief Executive told analysts at first-half earnings conference that another Tier-1 capital tranche is in pipeline.

Negative Signal

The speed at which equity research analysts built consensus on FCMB that resulted in bearish move signposts a weaker earnings expectation in 2020. FCMB performance has been dragged by continuous cash reserve ratio debits by Nigeria’s central bank, having quarantined a significant chunk of the Group total deposits.

This threatens the lender’s earning couple with the fact that as at first half, 29% of the bank’s loan book was restructured, while the Group targets at least 40% for the year. Unfortunately, the outbreak of coronavirus and eventual economic lockdown not only broke the Group’s growth trajectory but also worsen its outlook, according to equity note reviews.

After FCMB’s first-half earnings disappointment, more and more equity analysts have indicated their bearish stance on the lender’s prospects. The issue is not the downgrade, but investment banking firms’ negative consensus about the financial service Group’s performance. It came like a torrent whirlwind after the first half earnings release which, unfortunately, failed to excite the market.

FCMB is rated ‘hold’ by equity research analysts from United Capital, Meristem and Chapel Hill Denham while ARM Securities advised investors to ‘sell’ off the stock. Unfazed by mounting headwinds, Meristem Securities Limited stated that the Group consolidated on its earlier impressive top-line performance, supported by strong growth in earning assets and transaction volumes.

Management achieved the feat despite the pandemic and regulatory headwinds.

“Although we were optimistic about the Group’s performance after reviewing its first-quarter results, we held a muted outlook stance based on our assessment of the prevailing risks. We are encouraged by the Group’s ability to weather the storm, evident in the 9.35% year on year growth in gross earnings to ₦98.18 billion”, Meristem Securities noted.

For H2:2020, Meristem Securities stated that there are downside risks to top-line which include; a downward trend in interest rates and further loan restructuring (up to 40% of risk assets). Meanwhile, the investment firm listed upside factors to include the resumption of economic activities, strong loan book growth (+15% a full year, per management guidance), and additional income from its recent acquisition of AIICO Pensions Limited.

Analysts at Meristem then revise the top-line outlook to bullish from modest. Though, the firm stated that with a current effective CRR of 54%, the Group faces liquidity risk which may limit assets accretion. In reaching its recommendation, Meristem said banking regulatory risks remain a key concern for the Group despite its recent acquisition of an additional pension subsidiary.

The firm noted that the banking business currently accounts for 96.83% of gross earnings and 94.21% of Group net assets. FCMB rated hold after Meristem stated it is positive about the Group’s outlook, revised 2020 target price-earnings from 1.85x to 2.01x. Analysts expect EPS from ₦0.90 to ₦0.98 to arrive at a target price of C1.97. This implies a downside potential of 4.06%.

Assets and Resources Management (ARM) Securities equity analysts note stated that FCMB is achieved modest results and seems fairly valued. The firm said although, FCMB’s non-performing loan (NPL) ratio moderated to 3.5% over Q2 20 from  3.7% in 2019, the impact of the COVID-19 on several sectors led to an increased impairment charge.

They stated that the FCMB impairment charge increased +41% year on year to ₦7.7 billion.

“We believe the reduction in NPL despite economic disruptions was as a result of the loan restructuring which currently stands at about 29% of total loans.

In the period, FCMB’s return on average equity (ROAE) remained in single digits, settled at 9.4% in the first half of 2020 from 8.2% in the comparable period. Also, the capital adequacy ratio improved, printed at 17.3% from 16.3%, which means 230 basis points above the regulatory limit of 15%.

ARM Securities said FCMB’s loan to funding settled at 52.6% remains below the benchmark of 65% despite expanding its loan book by 11% year to date.

“We saw a sizeable jump in restricted reserve deposits (+102% YTD) which we believe is not unrelated to FCMB’s inability to meet the 65% LDR requirements fused with CBN’s need to manage liquidity as well as an increase in CRR to 27.5%”, analysts stated.

ARM Securities noted that at a market price of ₦1.90, the firm believes the stock is fairly valued and thus, recommend a SELL. Having noted the impacts of the two times debit in the second quarter of 2020, Nkemdilim Nwadialor, equity research analyst at Tellimer said: “We maintain our Buy recommendations on seven of the eight Nigerian bank stocks in our coverage, the exception being FCMB where we have a Hold”.

In a related development, Chapel Hill Denham analyst Aderonke Akinsola forecasted 12-month price target of ₦2.18 for FCMB, but maintain ‘hold’ rating.

“We maintain our HOLD rating on FCMB, but raise our 12-month TP by 32.9% to ₦2.18 post the stronger-than-expected performance in H1-20 amid the challenging economic environment”, Chapel Hill stated. The investment firm, however, projected a higher PAT forecast.

“This was mainly driven by the upward revision of our net interest income forecast (+5%) on strong loan growth and tamed funding costs as at H1-20 (due to lower rates and cheap deposit growth of 46%”, Chapel Hill’s Akinsola stated in the note.

The first half of 2020

FCMB reported a 9.3% uptick in gross earnings to ₦98.2 billion in the first half of 2020 amidst the outbreak of COVID-19. The growth in top-line was driven by interest income which grew by 8.2% year on year in H1-2020 and foreign exchange revaluation gains of about ₦3.3 billion amid loan growth and currency devaluation.

Given the impressive earnings and a 3.0% decline in interest expense, PBT and PAT grew by 25.6% and 28.8% respectively. To analysts, FCMB Group performance showed some resilient in core earnings.

United Capital’s research analyst Ayobami Omole stated that despite the expectation of depressed Q2- 2020 earnings amid COVID-19 uncertainties, gross earnings rose 4.1% year on year in Q2-2020. This spurred overall growth in H1-2020 to 9.3%. Specifically, he stated that the performance was buoyed by respective growth in Interest income and non-interest income.

Although the growth in Interest income was muted in Q2-2020, up 1.8% year on year, strong growth recorded in Q1-2020 drove the overall Interest income growth in H1-2020 to 8.2%. United Capital noted that this was on the back of 11.0% year to date growth in loans and advances as well as 25% growth in investment securities.

Also, Interest expense declined by 3.0% year on year in H1-2020, driven by a lower cost of funds amid the low-interest-rate environment that characterized the review period. Thus, net interest income grew by 17.4%. For non-interest income, naira devaluation and depreciation induced a 240% increase in foreign exchange gains to ₦3.3 billion in H1-2020 and offsetting the underwhelming performance of the fees and commissions income.

United Capital analyst Omole stated that this income line declined by 4.1% in H1-2020 on the back of regulatory reduction in charges. In terms of efficiency, growth in Current and Savings deposit, reduction in MPR and lower yield environment aided the moderation in the cost of funds while cost savings in Q2-2020 due to lockdown moderated cost to income ratio slightly from 73.5% to 70.1%.

In all, the growth in interest income and FX gains buoyed the bottom line numbers as PBT and PAT rose 25.6% and 28.8%  to ₦11.1 billion and ₦9.7 billion, respectively. United Capital explained that there is no cause for alarm in term of assets quality. Given the primary and secondary negative impact of the COVID-19 pandemic on the Nigerian economy, the firm stated that it had expected FCMB’s asset quality to significantly deteriorate.

Especially because 17% of the bank’s loan book was exposed to the highly affected Upstream Oil and Gas sector. Accordingly, analysts said this was reflected in the growth in impairment losses which jumped 40.8% to ₦7.7 billion in H1-2020.

However, FCMB’s NPL ratio remained flat quarter on quarter at 3.5% (down 0.8% from H1-2019) and below the regulatory minimum of 5% amid loan growth and partial write off of the 9-mobile loan which made up about 14.8% of the NPLs in H2-2019.

 “We expect challenges to persist amid the tough regulatory and macroeconomic environment. In line with the challenging macroeconomic environment, we adjust our risk premium slightly. Accordingly, we revise our target price to ₦1.82/share, a 4.2% downside from the current price of ₦1.90.

“Although, we believe the resilience in H1-2020 has shown that FCMB is more than well-positioned to weather the storm and emerge stronger post-COVID”, United Capital stated.

For asset quality, the bank plans to restructure about 40% of its loan book and provide a tenor extension to debtors in the oil and gas, manufacturing, retail, real estate, and power sector.