FCMB: Defying The Odds, FX Devaluation Supports Interest Income

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FCMB Group Plc. was able to sustain gross earnings growth (+10.04% YoY to NGN199.44bn) in 2020FY supported by both interest income and non-interest income.

Interest income was mainly driven by the 12.16% YoY improvement in interest on customer loans, as well as 12.27% YoY rise in income on investment securities, which jointly constitute over 90% of total interest income.

The sharp growth in interest income came as a surprise but Management attributed it to translation gains arising from the impact of FX devaluation on interest from dollar instruments, as well as interest income from investment securities bought in 2019FY (while interest rates were relatively higher).

The major drivers of non-interest income were fees-related income from increased customer usage of digital banking channels, and gains from revaluation of USD-denominated assets due to Naira devaluation during the year. In 2021FY, the bank’s digitalization of SME lending should support loan growth which will ultimately bode well for interest income. And while Management has not provided guidance on the possibility of loan repricing, we do expect that interest income will at least benefit from the uptick in the yield environment.

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We do not anticipate that FX gains will be as significant in 2021, a view shared by Management. Furthermore, trading gains are expected to moderate on the back of rising yield investment securities.

Improved Profitability Despite Inflationary and Impairment Pressures

Notwithstanding the +29.57% YoY growth in interest-bearing liabilities, the group’s cost of fund dipped by 112bps YoY, attributable to the regulatory reduction of interest rate on savings deposits and increase in low-cost deposits to 77.79% of total customer deposits (vs. 69.79% in 2019FY). Asset yield also improved to 11.65% (vs 10.41% in 2019FY) due to factors cited earlier. Hence, Net Interest Margin (NIM) rose by 149.00bps YoY to 8.10%. Elsewhere, while operating expenses increased by +9.68%YoY (on the back of inflationary pressures, IT-related expenses, regulatory overheads, and COVID-19 donations), the cost-to-income ratio (CIR) improved by 381.28bps on account of +16.06% YoY acceleration in operating income. Consequently, Profit After Tax grew by +13.11% YoY to NGN19.61bn, despite the sharp uptick (+62.27% YoY) in impairment charges (resulting from the volatile business environment in 2020FY). The continued accumulation of cheaper funding should further suppress cost of funds. This, together with the uptrend in investment yield, is expected to support NIM growth. Also, we expect relatively modest impairment charges in 2021 owing to an improved business environment. Therefore, we project an 8.08% YoY growth in Profit After Tax (to NGN21.19bn) in 2021FY.

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Asset Quality Resilient Despite Higher Default Risks

FCMB’s gross loan book expanded by 15.23% YoY to NGN869.28bn in 2020FY, 29.60% of which was triggered by Naira devaluation during the year. Management explained that the devaluation, coupled with past-due obligations from an oil and gas loan led to 3.40% increase in the group’s Non-Performing Loans (NPL). Nonetheless, we observed an overall improvement in asset quality as the NPL ratio declined to 3.29% from 3.67% in 2019FY. Other prudential ratios are comfortably above the regulatory minimum.

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Recommendation

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We forecast a 2021FY EPS of NGN1.06. Combining this with our target PE of 2.71x, we obtain a 2021FY target price of NGN2.88, implying a 0.46% downside potential based on its closing price on April 8,2021. Thus, we recommend a HOLD on the ticker

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