FCMB: Analysts Raise Earnings Expectation, Say Digital Banking to Drive Momentum
FCMB earnings expectation has been revised upward as analysts projected that the lender’s digital banking efforts will lift the group revenue in the financial year 2022. After earnings beat in 2021, the group consolidated on its performance in the first quarter of 2022.
In an equity report, analysts at CardinalStone Partners said following the bank’s impressive Q1-2022 performance, they gave revised earnings expectations upwards to N23.8billion from an initial expectation of N20.8 billion.
The firm said its robust earnings expectation primarily reflects an expected increase in net interest income on the impact of higher yields and an improved asset base.
In addition, analysts said they believe that the bank’s digital banking efforts should further bolster revenue from net fees and commissions. Nevertheless, the equity note pinpointed a significant downside risk to the positive expectation; the bank’s elevated operational cost. Meanwhile, analysts feel that FCMB’s asset base expansion will deliver ample rewards.
In the equity report, CardinalStone analysts said the expectation of rising yields in 2022 is likely to deliver considerable rewards across the banking sector.
“For FCMB, we assess that this reward will likely be concentrated on its returns from risk-asset creation”. Notably, the equity report said the breakdowns indicate that loans constitute about 75.5% of the bank’s interest-earning assets, with the 23.4% year on year increase in the line item in Q1-2022 suggesting that this trend could subsist.
“Aided by our forecasted loan growth of 8.0% and the expected increase in yields, we project 2022 interest income 15.4% higher at N186.9 billion from N178.2 billion.
“However, we worry about the potential impact of higher yields on funding costs, given that term deposits account for about 30.0% of the bank’s total deposit”, analysts explained.
Digital business is likely to support fees and commission income, according to Cardinalstone analysts’ position on the bank’s earnings outlook for the year. READ FCMB: Key Metrics Worsen as Debits, Funding Pressure Prompt…
Explaining this, analysts said 2021 digital revenues surged by about 93.0% year on year to N26.1 billion and accounted for about 63.0% of total non-interest income and 14.2% of gross earnings.
“This digital momentum was mostly carried into Q1-2022 on the combined impact of higher transaction count and volumes, expansion in digital lending, increase in customer acquisition and improved digital adoption, and rapid growth in its agency banking network”.
In the first quarter of 2022, digital lending accounted for 61.0% of digital revenue. Analysts said FCMB’s plans to reduce branch footfall and leverage digital to scale lending and cross-sell payments could bode well for the sustenance of the current digital momentum.
Cost pressures: FCMB has continued to witness significant cost pressures on its operations, said CardinalStone analysts in the equity report. They noted that the bank’s cost to income ratio rose by 90 basis points in Q1-2022, saying this was dragged by the Asset Management Corp. (AMCON) levy and IT-related expenses.
Analysts said the AMCON levies are likely to track increases in the bank’s asset base, while the aggressive digital strategy may stoke IT-related expenses in the financial year 2022.
Asset, Capital: Since the June 2020 restructuring of about 40.0% of its loan book, FCMB has recorded improvements in its asset quality, according to the review. Analysts said these improvements ranged from the reduction in restructured loans to about 28.0% in Dec 2020 to the 80 basis points improvement in cost-of-risk to about 1.0% in Q1-2022.
“We also note that the non-performing loan (NPL) ratio has remained within regulatory limits since the financial year 2019”, the equity report said. Analysts hint that the moderation in NPL coverage ratio to 53.2% in 2021 from 61.9% in 2020 appears concerning. Elsewhere, the bank reported a 15.75% as capital adequacy ratio which was 75 basis points above the regulatory limit.
But, the CAR level was 125 basis points short of CardinalStone analysts’ comfort level – regulatory limit+200 basis points. This low cushion is likely to constrain the capacity to expand credit aggressively, according to the equity report. #FCMB: Analysts Raise Earnings Expectation, Say Digital Banking to Drive Momentum