FCMB Shows Resilience Despite Tough Terrain
First City Monument Bank posted impressive financial results for 2014 despite the headwinds in the banking sector, writes Goddy Egene
First City Monument Bank Plc was founded as a merchant bank. But the changing regulations in the financial industry made it to transform into a commercial bank. Despite its investment banking background, FCMB has performed very well as a full service banking group . It survived the consolidation that swallowed many brands and has remained a resilient financial institution putting smiles on the faces of all stakeholders.
When bigger banks were weakened by the challenging operating environment, FCMB has proved to be resilient. This resilience has been mines feasted again in the 2014 financial year as the bank net income rose by 38 per cent.
Corporate Profile
FCMB, which has a vision to be the premier financial services group of African origin’, was established in 1982. From its early origins in investment banking as City Securities Limited in 1977, FCMB has emerged as one of the leading financial services institutions in Nigeria and one of the top eight lenders in the country.
Specifically, FCMB was incorporated as a private limited liability company on 20 April 1982 and granted a banking licence on 11 August 1983. On 15 July 2004, the bank changed its status from a private limited liability company to a public limited liability company and was listed on the Nigerian Stock Exchange (NSE) in December 2004.
It has over 270 branches in Nigeria and a licensed banking subsidiary in the United Kingdom (FCMB UK) and a representative office in the Republic of South Africa.
FCMB has a Board of Directors comprising chairman and 10 other directors. Olutola Senbore is the chairman while Ladi Balogun is the Group Managing Director / Chief Executive Officer. Segun Odusanya is the Deputy Managing Director/ Executive Director. Executive directors are: Nath Ude(Service Management & Technology), Olufemi Bakre (Lagos & South West Nigeria) and Adam Nuru (Abuja & North Nigeria). Non-executive directors are; Bismarck Rewane, Mfon Usoro, John Udofa and Nigel Kenny.
Financial Results
Gross earnings were up by 13 per cent to N148.63 billion in the review period compared with N140 billion in 2013. Operating expenses jumped by 14 per cent to N65.76 billion compared with N58.15 billion in 2013. FCMB is also aggressive about lending as its loans to deposit ratio spiked to 83.67 per cent in 2014, from 63 per cent in 2013. Loans to customers surged by 37 percent to N617.98 billion in 2014, from N450.53 billion in 2013.
The bank’s earnings per share (EPS) increased by 38 per cent to 112 kobo in 2014 from 81 kobo in 2013. Return on average equity (ROAE) increased to 14.58 per cent in 2014 from 11.61 per cent in 2013, while the return on average assets (ROAA) jumped to 2.05 per cent in 2014 from 1.67 in 2013. FCMB declared a dividend of 25 kobo, which represents a payout of 22 per cent down 37 per cent in 2013 and a dividend indicated gross yield of 11.45 per cent.
Commenting on the results, Group Managing Director/CEO of First City Monument Bank Limited, Mr. Ladi Balogun, said, “our commercial and retail banking activities continue to be the key driver of group performance, with 26 per cent growth in profit before tax. Specifically, the growth in our retail banking activities enabled us to not only attain industry leading margins but also deliver 37 per cent loan growth.”
Looking at the future, he assured that, “we will remain focused on improving operating efficiency, whilst also continuing with our steady customer acquisition drive and migration to alternate service channels in order to provide a more consistent convenient customer experience. We will seek to moderate cost of risk by consolidating our risk acceptance criteria in an increasingly high-risk environment, while focusing on deposit growth. Overall, we are confident our progress will be sustained, as we continue to grow our market share, and improve our margins and efficiency ratios.”
Commenting on the results analysts at Meristem Securities Limited (MSL) said consistent with the recent trend of earnings results by banks, FCMB comfortably weathered regulatory and macroeconomic challenges in 2014 to record impressive growth in both top and bottom line.
“The group’s gross earnings and PBT rose 13.5 per cent and 31.7 per cent to N148.6 billion and N23.9 billion respectively in 2014. In the same line, the group’s PAT came in at N22.1 billion, in line with our 2014 projection of N22.1bn and 38.3 per cent higher than N16 billion reported in 2013. The bank’s earnings per share (EPS) of N1.12 in 2014 was broadly in line with our 2014 EPS forecast of N1.18, but outperformed analysts’ consensus estimate of 90kobo,” they said.
According to them, the bank’s strong performance in profitability in 2014 was achieved majorly due to the aggressive growth in risk assets (up 37.2 per cent ) which bolstered the bank’s interest income (up 14.2 per cent) to N118 billion in 2014, against a muted growth (-0.3 per cent) in interest expense to N45.4 billion.
“Consequently, net interest income rose 25.7 per cent to N72.6 billion in 2014. Accordingly, the bank’s return on average assets (RoAA) and return on average equity (RoAE) settled at 2.0 per cent and 14.6 per cent in 2014, a 30bps and 300bps improvement from 11.6 per cent and 1.7 per cent recorded in 2013,” they said.
Expanded Loan Book
The analysts said in lieu of the regulatory headwinds within the last two years that have constrained cheap revenue lines of Nigerian banks, FCMB expanded its loan books significantly to earn higher returns on its yielding assets and offset the lower revenue growth prospect in Non-Interest Income (NII) items.
“Hence, loans & advances rose 37.2 per cent from N450.0 billion in 2013 in 2013 to N618 billion in 2014. The bank also concurrently reduced investments in short term and liquid instruments such as cash and cash equivalent balances (down 36.8 per cent) and investment securities (down 9.4 per cent) to free up liquidity to grow loan books,” they noted.
Impairment Charges Rise
On the back of the aggressive loan growth recorded in 2014 (oil & gas lending represents 23.5 per cent of FCMB’s gross loan book), there was a 33.3% increase in loans impairment charges to N10.6 billion, from N8.0 billion in 2013.
“” Subsequently, the cost of risk increased to 1.8 per cent in :2014 from 1.4 per cent in 2013. This is obviously attributed to the recent challenges in the oil & gas sector on the back of significant drop in crude oil prices. The bank’s management stated that it had to take pre-emptive measures by increasing loan loss provision in 2014.
Modest Growth in Deposits
The analysts note that the significant reduction in liquid instruments and aggressive growth in the loan books without a commensurate increase in deposits (which rose 3.0 per cent to N738.6 billion) led to the drop in the bank’s Liquidity Ratio (LR).
“FCMB’s LR declined from 45.1 per cent in 2013 to 32.3 per cent in 2014, just 2.3 per cent above CBN regulatory benchmark of 30.0 per cent. Consequently, Loan to Deposit ratio (LD) also rose simultaneously from 63.0 per cent to 83.7 per cent, slightly above the CBN regulatory cap of 80 per cent,” they said.
Buy Rating
The analysts said FCMB’s diversified operating business segments and improved revenue growth from the corporate and retail banking segments continue to build the bank despite the macroeconomic challenges and tight regulatory landscape.
According to them, nevertheless, they expect the identified challenges of increasing credit impairments charges, macroeconomic weakness (lower GDP growth rate) and constrained loan growth (estimates 20 per cent for 2015) to moderate top-line and bottom-line growth in 2015.
“As a result, we have reduced slightly our 2015 PAT forecast from N32.1 billion to N31.9 billion. Despite the slight reduction in our 2015 PAT forecast for FCMB, the increase in the country risk free rate and risk premium from 11.0 per cent and 9.0 per cent to 15 per cent and 11 led to the significant reduction in our 12-month target price from N6.68 to N4.05. However, this still presents an upside potential of 45.5 per cent based on the current price (N2.78) as at March 26, 2015. Hence, hence we retain our BUY recommendation on the counter,” they said.