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FCMB’s Q1 18 results showed a 33% decline in earnings from Q4 17 to N2.58bn. Quarterly analysis showed that Non-interest income declined by 40% and Net interest income by 14%, overshadowing the 9% decline in Opex and 52% decline in credit losses. On a y/y basis, Q1 18 PAT was 47% stronger. When annualised, Q1 18 PAT is tracking behind our FY18e by 8% and Bloomberg consensus by 13.8%.

Net Interest Income is weaker

NII was N17.7bn, down 14% q/q but up 14% y/y. On a q/q basis, Interest income weakened by 9.5% while interest expense declined by 3.5%. Over the comparable period, interest-bearing assets increased by 17.6 % while yield on assets declined by 200bps to 12%.

Thus, we suspect the decline in yields was a driver of lower interest income.  Positively, interest expense declined by 3.5% while Cost of funds declined by about 100bps to 6.8% for Q1 18 despite an 8% growth in customer deposits. Overall, NIMs came in at 6.8%, showing a 250bps q/q contraction.

Non-Interest Revenue also weaker than expected.

Non-interest revenue declined by 40% q/q to N8bn (up 5% y/y). Over the quarter, net trading income improved to N1.5bn (up 160%) while Net fees and commissions income grew by 6.8% to N4.7bn. However, other revenue income saw an 81% decline to N1.5bn as gains from sale of fixed assets dropped significantly >N0.4mn and FX Gains >N1bn.

Opex trended lower

This was driven by an 11% decline in Staff costs, 8.9% in General and Admin expenses, 8.8% in other expenses over the period. On a y/y basis, Opex inched higher by 9%, with growth witness across all cost lines.

Also, there was a one-off contingency provision for pending litigations in 4Q17. Q1 18 operating efficiency declined to 68.6%, from 57.1% in the preceding quarter due to a lower operating income.

Lower cost of risk

Credit losses declined by 51.5% to N4.bn for Q1 18. Thus, Cost of risk dropped to 3.3%, down by 400bps q/q. However, NPL ratio inched high by 40bps to 5.3%. Our current FY 18e for COR is 3.4% and for NPL ratio is 4.5%.

IFRS 9 impact

There was an adjustment of N15.2bn, in compliance with IFRS 9 implementation requirements, which resulted in a decrease of shareholders’ fund by 8%. Capital adequacy ratio improved by 120bps to 18%, we had expected IFRS 9 implementation to have reflected as a minor deduction.

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Valuation: We have a SELL recommendation for FCMB with a TP of N1.45.

Deal book 300 x 250

Disclaimer: This is not an investment recommendation or call to action on any of the stock(s) mentioned above. Recommendation stated above is for the writer(s) and their subscribers. Kindly consult your stockbroker or Financial advisor for any investment decision.

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