First City Monument Bank Plc (FCMB) reported a 15% YoY rise in gross earnings to N148 billion (9M 14: +10% YoY) for the 12 months ended December 2014. PBT rose 32% YoY to N23.9 billion (9M 14: +14% YoY) while PAT was up 38% YoY to N22.1 billion (9M 14: +11% YoY).
- FMCB declared a 25 kobo dividend per share which implies a 22% payout ratio (FY 13: 37%) and a yield of 10% using its last trading price.
Higher Q4 yield environment and switch to low cost funding underpin NIM expansion
- Q4 14 gross earnings rose 13.1% QoQ to N41 billion – its quickest pace since Q4 2011 – largely on account of double digit rise in interest income (+15% QoQ to N33.5 billion) whilst NIR provided support (+8.5% QoQ to N7.7 billion). Breakdowns provided by FCMB on interest income identify investment securities (+82% QoQ to N8.3 billion) as key driver of interest income growth with a flat QoQ trend in income from loans and advances. The stagnant movement in the latter reflects continued slowdown in risk asset creation (+9.4% QoQ) especially when 8% USDNGN devaluation and FCY share of loans at 43% are taken into account (H1 average: 11% QoQ). Thus, reflecting higher fixed income yields in Q4 14 (Bills: +276bps, Bonds: +318bps) annualized asset yields rose 30bps QoQ to 12.3%.
- On NIR, relative to stronger forex-boosted numbers reported by other banks that have released thus far, with GTB (+49% QoQ), Zenith (+91% QoQ) and Access (+19% QoQ), FCMB’s QoQ reading is tame. The softer NIR expansion reflects offsetting impact of 44% QoQ moderation in net fee income on FX trading gains (+93% QoQ) with the former driven by a cutback in service charges and fee income and the latter by heightened USDNGN volatility over the quarter.
- Despite a 9% QoQ rise in funding base to N879 billion as borrowings (+64% QoQ to N140 billion) rose following N26 billion Tier II naira debt issuance in Q4 14 and a tenfold QoQ rise in interbank takings, Q4 14 interest expense contracted 20% QoQ to N9.9 billion. Disaggregating the components throws up a 41% QoQ contraction in interest expense on customer deposits as the key driver suggesting FCMB replaced more expensive tenured deposits (in line with management commentary at Q3 14 earnings call) with low cost retail and syndicated LT borrowings. The substitution with cheaper funds resulted in annualized WACF declining 68bps QoQ to 5.16% by our estimates and boosted NIM (+50bps QoQ to 8.6%).
Tight lid on personnel expenses temper regulatory pressures and impairment spike
- Additional cost gains emanated from sustained control on opex, which expanded 3.5% QoQ to N17.4 billion (H1 average: +7% QoQ) as 2% QoQ contraction in personnel expenses tempered impact of regulatory cost-induced increases in ‘other expenses’ (+34% QoQ). The subdued opex expansion permitted feed-through of gains from NIM expansion resulting in CIR declining 15pps QoQ to 56%.
- Having remained muted over much of 2014, provisions jumped fourfold QoQ to N6.7 billion as NPL ratio jumped 90bps QoQ to 3.6%. Though FMCB did not provide breakdowns, we believe given strong loan growth over FY 14 (+37% YoY) driven by higher oil and gas and consumer lending, impairment pressures hints at macro risks around FX and weaker oil prices.
- Nonetheless, the higher impairments were not enough to derail momentum from NIM expansion with PBT rising 27% QoQ to N7.2 billion whilst a tax write-back of N749 million drove a wider expansion (+70% QoQ) in PAT to N7.9 billion. The improvement in Q4 underpinned 2pps and 3pps YoY expansion in FY 14 PBT and PAT margins to 16% and 15% respectively.
Macro risks to drive cut in FVE, but upside after sell-off to keep BUY rating intact
- As with the rest of the banking sector, the weaker macroeconomic clime on account of the oil price softness and USDNGN devaluation is central to outlook, moreso with FCMB given strong loan growth to oil and gas (upstream) and general commerce which cumulatively account for 25% of loan book. Furthermore given FMCB’s strong retail exposure (21% of total loans), the pressured domestic landscape should result in higher risk of asset quality deterioration in the segment. The foregoing is likely to result in upward revisions to our cost of risk assumptions. Nonetheless, Tier II capital raise which resulted in CAR rising 100bps YoY to 19% (Under Basel II/III), which provides 400bps buffer over regulatory limits for Non-SIFI banks, improved funding mix and cost containment could temper impact of macro concerns on our FVE. FCMB currently trades at P/E of 2.3x and P/B of 0.3x which are both at discounts to peer averages. The stock has declined 22% since our last update with last trading price of N2.62 at a sizable discount to our last published FVE (N5.2) for FCMB leaving sufficient scope for our BUY rating to persist post revisions to our model.