FCMB Group: Q3 earnings show significant pressure across key lines

FCMB Group plc has finally released its statement of comprehensive income for the period ended September 30, 2015.

The Holding Company’s current scorecard did not come in as surprise to investors following an earnings warning issued by the management of FCMB Group stating the fourth week in January for completion of the banking subsidiary’s interim audit.

Peter Obaseki, managing director, FCMB Group plc had in the earnings warning issued at the Nigerian Stock Exchange said the Holdco’s Q3’15 earnings would be materially below earnings for the same period in 2014, due to two factors:  a spike in impairments particularly in the energy sector and the significant reduction in trade finance-related revenues due to foreign exchange illiquidity.

Quite in line with the management statement, FCMB Q3’15 earnings show significant pressure across key line items. Though, FCMB Group plc reported 2 percent growth in Q3’15 gross earnings to N109.294billion from N106.703billion in the corresponding period of 2014.

Like other financial institutions that lend money, the Net Interest Income (NII) – a difference between interest earned by FCMB Group plc and interest it paid declined by 1 percent to N48.709billion from a high of N49.104billion in Q3’14. Also, its Profit Before Tax (PBT) declined by 85 percent to N2.563billion from N16.782billion in Q3’14.

Likewise, Profit After Tax (PAT) was down by 87 percent in Q3’15 to N1.865billion from N14.223billion in Q3’14. Earnings per Share (EPS) – a measure of the portion of its profit that FCMB Group allocates to each outstanding share of common stock –declined remarkably by 87 percent from 96kobo to 13kobo.

A further look at FCMB Group statement of financial position as at September 30, 2015 revealed that the value of its derivative assets held declined by 75 percent to N1.117 billion from N4.503 billion. Loans and advances to customers declined by 8 percent to N568.496billion from N617.979billion. Deposits from customers declined by 4 percent to N703.226billion as against N733.796billion in Q3’14.

“This trend continued in 4Q15 and largely emanated from wholesale banking activities, while retail banking showed greater resilience and earnings momentum. 2016 will be characterised by continued growth in retail contribution, stabilisation of wholesale banking revenues and increased focus on cost efficiencies (opex, funding and risk) in order to restore earnings levels,” Obaseki had said in the Q3’15 earnings warning.

Olawale Olusi, an investment research analyst at Afrinvest believes that the overall loan growth of FCMB Group was poor, though he noted that the company which had issued an earnings warning could not have performed in isolation of recent developments in the macro economy which have affected the banking sector numbers.

While taking a look at FCMB Group results, Olubunmi Asaolu led team of research analysts at FBNQuest said, “Although, non-interest income surprised positively, beating our estimate by 21%, the weakness on the funding income line proved more significant. Further down the profit and loss (P&L) impairment charges came in 162 percent higher than our forecast and was the major driver behind the negative surprises in PBT and PAT”.

“Given the scale of the loss in Q3 or the negative surprise in loan loss provisions, we would expect the market to have major concerns as to what FCMB’s results will show in Q4 and through 2016. We will not be surprised if worst case scenarios of losses start to feature in discussions. Having said that, the bank’s Capital Adequacy Ratio (CAR) of slightly over 18percent is robust enough in our view. There is no read-across to the rest of the sector given that all the other banks had reported their Q3 results last year. FCMB’s was delayed because the bank was auditing the accounts. We would expect investors to focus mainly on the provisions line when the bank hosts its conference call later this week”, FBNQuest analysts added in their first reaction to FCMB Group plc Q3’15 results. “We rate the shares Underperform. Our estimates are under review”. The analysts noted that the share price of FCMB Group has lost 42percent year-to-date (ytd), worse than the -17 percent return on the NSE All Share Index. 

Olalekan Olabode led team of equity research analysts at Vetiva Capital Management Limited saw as disappointing, the 87 percent year-on-year decline in FCMB Group earnings per share (EPS), adding that loan provision stifled profit as default spiked.

“Although the Group had earlier (two weeks ago) warned that Q3’15 earnings will be materially below Q3’14 due to spike in impairments (particularly in the Energy sector) and the significant reduction in trade finance-related revenues largely as a result of the illiquid foreign exchange market, FCMB’s performance still came in weaker than most analysts had anticipated”, the analysts added.

“In line with management’s warning, loan loss provision rose 290percent y/y to N15.3 billion (ahead of our N5.4 billion forecast) – largely due to a specific impairment of N5.4 billion on a contracted receivable that the bank is hopeful of recovering in future. We have updated our model for the disappointing result and revised our forecast to reflect the negative surprise”, the analysts at Vetiva Capital Management Limited added. 

Iheanyi Nwachukwu