Nigeria Banking Sector Coverage - December 2011 'Bad ... - Imara

FCMB’s 9M 11 results to September reflected a slowdown
in impetus from both the FY 10 rates of growth, which
would be expected however given the higher base effect,
as well as relative to H1 11. Gross earnings were up
23.45% to NGN 55.0bn. Interest income drove revenue
growth, increasing by 40.58% on a net basis to NGN
22.2bn, as interest and discount income growth of 21.40%
y-o-y well exceeded that of interest expense at 3.28%.
NIMs were marginally down to 6.8% compared with 6.9%
at 9M 10 and H1 11, as deposits grew ahead of advances
in an environment of margin pressure.
Non-interest income recorded an increase of 28.94% to
NGN 15.6bn, hampered by a 15.86% fall in corporate
finance fees as commissions went up by 95.56%, trading
income by 10.93% and other income by 82.72%. Operating
income increased by 35.52% to NGN 37.8bn y-o-y, and
5.84% q-o-q.
Operating expenses remained well shackled, up by just
4.12% to NGN 24.5bn, leading to a massive improvement
in the cost to income ratio from 84.46% to 64.89% on a y-
o-y comparison, while the improvement from H1 11 was
from 65.79%.
Y-o-y provisions went from a net NGN 1.8bn written back
to a charge of NGN 3.4bn. The NPL ratio still improved,
however, following further AMCON sales, to 4.32% from
5.52% at the year end. PBT went up by 62.01% y-o-y, with
attributable earnings closing the period at NGN 7.9bn, an
increase of 72.81%. Earnings at the half year stood at NGN
5.3bn.
Balance sheet growth was 3.84% from H1 11, with total
assets at NGN 611.1bn. This was as a result of the AMCON
sales diluted 4.62% increase in net loans and advances to
NGN 318.9bn, as well as the 14.30% increase in
investment securities to NGN 151.0bn. The advances book
continued to be dominated by corporates, reflecting the
bank’s wholesale roots, with just 19% of gross loans to
retail customers, slightly up from 18% at the half year.
While this makes the book lower risk, it obviously limits
the extent to which loans can be repriced as the
corporates would carry a lower risk profile while lending
in that space is more competitive. The group also noted
that there was a deliberate move to boost off balance
sheet activities (up 94.24% from FY 10 to NGN 126.7bn) so
as to limit the impact of the 0.3% AMCON levy which is
based on total assets. As aforementioned, there was
further improvement in the NPL ratio, while the coverage
ratio declined to 104% from 114% at H1, a function of
AMCON sales and attendant write-offs. The group had
exposure to Zenon, which was expected to be resolved in
Q4, with FCMB anticipating a 25% haircut on its AMCON
sale.
Customer deposits growth remained measured, up 2.25%
to NGN 371.0bn, as the group maintained its strategy to
realign the deposit mix towards lower cost current and
savings accounts, the NIM effects of which would be fully
felt in FY 12. The CAR ended the period at 30.48%,
slightly lower than the 31% at FY 10 and H1 11.
Outlook
With its retail unit only just having broken even in Q3
11, FCMB, like Access Bank and indeed ETI, has sought
to strengthen its position in the sector via acquisition.
The banking crisis led to an opportunity to acquire
FinBank, a transaction which has now been approved
by both sets of shareholders and regulators. Under the
terms of the merger, AMCON was to recapitalise
FinBank to a zero NAV, via an injection of NGN
155.6bn in financial accommodation. FCMB would
then inject NGN 6bn as equity into the bank, via an
SPV, giving it 100% ownership. The consideration paid
by FCMB of NGN 6bn would be split between existing
FinBank shareholders (NGN 1.64bn by way of 10 kobo
per share or 1 FCMB share for every 60 existing shares
held) and AMCON (NGN 4.36bn by way of NGN 1.02
per share or 1 FCMB share for every 6 scheme shares
held). FCMB would also set aside NGN 16bn in capital
to ensure FinBank’s CAR is sufficient until the merger,
which management expects to be concluded by the
latest, in Q3 2012.
The positives arising from this merger for FCMB are
clear. The most obvious will be the transformation of
the bank’s funding profile from a wholesale slant to
retail, and the impact on reducing cost of funds. The
merger will immediately double FCMB’s retail and
commercial customer pool to c1.2m, give FCMB access
to a growing base of mobile payment customers,
estimated at 300,000 presently, create cross selling
opportunities and of course, give it access to an
increased branch network, going from 149 branches to
333.
Other pluses arising from the merger will see the
combined entity’s financial leverage increasing by
about 50%, cost synergies leading to over 30% cost
savings, a fall in the LDR to 64% from 85% at the time
the 9M results were released, an improvement in the
liquidity ratio to 86% from 54% as well as proceeds
from any disposal of non-core subsidiaries of FinBank.
With a maximum shareholder dilution of just 2% for
FCMB expected to arise from the transaction, the deal
is expected to be accretive very quickly for FCMB,
with accelerated synergy benefits manifesting in Q4
2012.
Valuation and Recommendation
Our DCF valuation for FCMB comes out at NGN 9.56
per share, which is substantially above its current
share price of NGN 3.78. This is a pre-M&A valuation,
with a coverage based PBV average based on the last
published post merger pro-forma accounts suggests a
valuation of NGN 7.99 per share. BUY.
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