Ladi Balogun GMD, FCMB

By JULIUS ALAGBE

FCMB Group seems to be reaping its deliberate and strategic plan to remain stable while consolidating on any gains, as the tough environmental headwinds that have to characterize the Nigerian business climate has failed to deter its growth trajectory. According to the bank, it will meet short term challenges of COVID-19 and declining global prices of oil with increased customers focus and innovation.

For 2020, the Group recognised that downside pressures exist with transactions commissions, trade finance and a potential increase in impairment charge as part of the current reality of the industry. Several analysts said they maintained BUY rating on FCMB stock due to its strong fundamental. Analysts’ position was also supported by strong earnings diversification.

By consensus review, some equity analysts expressed satisfaction with lower exposure to power, the energy sector. Meanwhile, FCMB is expected to release the first-quarter 2020 unaudited financial statement on April 30.

Estimates

FCMB maintains a 14% loan growth target for 2020. The Group Chief Executive Officer, Mr Ladi Balogun, revealed that the guidance for 2020 before COVID-19 remains unchanged.

While citing opportunities that exist, FCMB explained that top tier corporates looking to restructure, source working capital for COVID-19 related distributions and currency devaluation will create demand for loans.

In the outlook, the Group expects Assets-Under-Management (AUM) to increase more than 20%. FCMB Group boss stated that the growth will be driven by organic and inorganic opportunities. In 2019, AUM grew by more than 28% to N403.1 billion as against N314.3 billion in the corresponding year in 2018.

Business interest

FCMB played strong in the oil and gas sector as 17.1% of its gross loans were credited to clients in this segment. It was observed that FCMB Group had no appetite for Power and Energy deals in 2019. Also, the Group audited financial statement showed that FCMB exposure to real estate and manufacturing sectors were 10.7% and 10.1% respectively.

Though, it recorded 15.3% non-performing loans associated with gross loans from clients in information and telecoms market. In the real estate segment, it also recorded 7.9% NPL followed by 7.6% from individual clients that access credit from the bank. With more than 6% year to date loss in the stock market, analysts project that the earning season will be boring.

In 2019, FCMB strengthened its capital position as pointed by increased capital adequacy ratio to 18.49% compared to 15% required by the Central Bank. This was the case despite the reported increase in loans book. Management explained that its liquidity position retreated owing to 42.6% in the restricted fund. This had resulted in a cash reserve ratio of 31.2% in 2019.

Earnings performance

FCMB Group revved up earnings despite the harsh economic environment in 2019. The banking industry witnessed regulatory headwinds as the apex bank increased margin dilutive regulations. Amidst this, the financial service group raised revenue by 2.3% following a 4.4% increase in interest income.

The Group struggled well at managing its cost structure. In 2018, FCMB expended N67 on every N100 revenue is generated at the group level. However, 2019 came with a fairly better position. In the year, it expended N65.5 on every N100 income the Group generated before considering overheads.

Analysts are of the view that the performance of financial services operators often reflects the state of the economic position at the time. Nigeria’s gross domestic size had jerked up at about 2.3% in 2019, following stable oil prices and productions volumes. However, FCMB performance was affected by regulations, rivalry and constraints round funding.

The Central Bank of Nigeria had raised Cash Reserve Ratio to 27.5% from the previous position by 500 basis points. This, plus 65% loans to deposit ratio target left several operators with a tighter financial position with just 7.5% to deal. Interest yielding assets returned a total sum of N137.4 billion as against N131.2 billion in the comparable period in 2018.

But, FCMB cost of funds came in at 5.3%, which resulted to increase in average growth in interest paid on funding sources. Interest payment grew more than 8%, from N59.1 billion to N64 billion at the end of the financial year 2019. FCMB is expected to reprice deposits bouquet as return on Treasury Bills has been brought down significantly.

A steep increase in interest payment at the time when real return sloped is unexpected. This could be proved by the decline in interest income which was due to a price war in the banking sector. Banking sector performance in 2019 largely features a lower interest rate regime, followed by increase loan size but thinner margin.

Meanwhile, the drill in financials left net interest income of the Group at N73.5 billion. This represents an uptick of 1.2% from N72.6 billion in the comparable year in 2018. Non-interest income came a bit weak when compared with industry performance in 2019.

Asset quality

Non-performing loans ratio at the Group level closed the year at 3.7% in 2019. This was 223 basis points lower than 5.9% recorded in 2018. Meanwhile, the quality of the strong asset in 2019 caused a 2.6% drop in impairment charges on credit losses booked by FCMB. Looking at interest earnings assets side, it was observed that investment and other income dropped by about 4% from N45.6 billion to N43.8 billion in 2019.

The management was able to reduce overhead position even though the nation recorded 11.4% average inflation rate in 2019. Operating expenses were reduced by about 3% from N79.2 billion to N76.9 billion. Analysts explained that this supported the bottom line which would have otherwise come weaker.

It was observed that wage and salaries which accounted for a significant chunk of the Group operating expenses expanded. Salaries and wage surged by 10.3% from N20.820 billion in 2018 to N22.970 billion a year after. FCMB reflated bottom line by more than 9% while declined tax payment jerked up post-tax profit significantly.

The Group’s report showed that profit for the year jerked up by 15.8% from N14.971 billion to N17.337 billion in 2019. The operating performance reflected positively on the balance sheet position. The Group shareholders’ funds expanded to N200.666 billion. This was about 9.4% above N183.427 billion.

Total assets increased N1.668 trillion. This represents an increase of 16.6 when compared to N1.431 trillion in 2018. The growth in balance sheet size was supported by a surge in the bank’s credit assets and investment in securities. Cash and cash equivalent jerked up significantly in 2019. It moved from N185.147 billion to N223.454 billion.

A detail looks into the Group financial statement showed that the cash includes current balances with banks within Nigeria and outside Nigeria at the end of 2019. This was apart from placement with local and foreign banks. Meanwhile, cash in foreign banks accounted for about 38% of the cash and cash equivalent in 2019.

FCMB restricted reserves ballooned. Restricted mandatory reserves deposit with the CBN increased to N156.834 billion from N121.386 billion in 2018. The Group’s special cash requirement which is 5% special intervention reserve was flat at N25.11 billion between 2018 and 2019.

However, the bank explained in the financial statement that the loan to deposit ratio reserve was N26.971 billion. The amount represents restricted reserve for the failure of the banking subsidiary to meet the Loan to Deposit Ratio of 65% as of 31 December 2019.

Loans profile

FCMB grew loan book by 13.08% year on year. In 2018, FCMB loan book had to carry a value of N633.034 billion. However, pushed by the need to meet LDR target of 65%, the bank raised its total credit book to N715.88 billion in 2019. On gross loans to customers which settled at N754.390 billion in 2019, the bank booked N38.51 billion as impairment allowance.

This shows a better position when compared with N48.291 billion charge taken in 2018 when gross loans to customers were N681.332 billion. The characteristics of the Group’s loans book shows that corporate lending accounted for more than 76% of the impairment charge taken on gross loans in 2019. In 2018, impairment allowance on corporate lending was more than 82%. Then, gross loans were lower but credit charges were heavier.

Deposits

FCMB Group failed to meet 65% loans to deposits ratio target in 2019 even though it was able to grow deposits by 20%. Total deposits increased to N1.033 trillion in 2019 as against N860.9 billion recorded in 2018. Specifically, deposits from customers increased to N943.085 billion.

This represents an increase of 14.77% compared to N821.747 billion recorded in 2018. Meanwhile, the report shows that FCMB Group’s customers’ base increased by 27.5% to 7 million in 2019 from 5.5 million customers in 2018.