FCMB’s weak strategic buffer dampens profitability, assets quality

However, the reverse seems to be the case this time around as the CBN intensifies efforts to reduce access to forex and the arbitrage margins of banks.

FCMB Group Plc seems to have been hit badly by the unfolding developments in the forex market and this is already showing  in its profit margin as with most banks.

The bank’s profit went down by 14% in the first half of financial year 2015 whereas the economy expanded by about 4% in the first quarter of the same year, albeit at slower rate compare to the fourth quarter performance in 2014.

FCMB, financial service group believes that its performance was encumbered as economy entered a higher risk level. Having presented a financial scorecard that was rough in the first half the hope of recovery looks dicey and precarious in the second half of the year.

This is the case given the fact that nothing seems to have changed significantly in term of economic policy.

Like some of its peers, FCMB is relying on second half of the year to upturn its position for better financial performance.

This may be unreliable given the nature of externalities moving against the economy, the industry as well as individual inherent issues – from liquidity to capital adequacy, dwindling forex contribution and lack of policy direction for the economy.

The Group conserved its business energy for second half of the year to improve performance. Worst is yet to be heard as CBN foreign exchange policy has placed an obligation on banks to aid the apex bank currency target. Now that banks are not collecting dollar as deposits, some element of profit is expected to be lost.

Going by its figures, downtrodden first half results in financial year 2015 signpost a bad year for FCMB. Should the management’s claim on economy be true, then, there is no much time left for the bank to overcome its political-economic threats as oil price continues to be priced down and looming strangulation of the forex market.

Simply put, if the bank non-performance in actual fact is hinged on the big picture in the economy, there are more to contend with going forward in the second half. The management will have to wait till the end of third quarter to understand the government economic policy direction

In the short term, FCMB Group has no issue with liquidity, currently operating above the CBN’s benchmark ratio of 30% though its rate dropped to 31.8% from 32.6% in the first half 2014.

Macro economic situation could have direct impact in the banking sector, negative as it may look but there are undoubtedly opportunities that are presented. Strategically focused banks are discovering this but laggards often have something to anchor their non-performance on.

Analysts articulated that banking operation was tight in the first half. This gives some deposit money banks an opportunity to misplace focus, claiming conservatism to replace rivalry among operators for a limited market that exclude real sector deficit financial plans that remain unmet.

Here is the big question to FCMB Group managing director and other relevant movers and shakers within the company: Is there no bank that achieved better financial scorecard in the first half 2015 compare to the base year performance? What did they do right to get better results?

The Group’s performance scorecard shows that FCMB struggled with its earnings on the back of weaker revenue; at the same time, it was smacked by expanded non-performing loans.

The banking segment’s business includes significant loans facilities to individuals, perhaps high net worth people but the downside risk cannot be ignore all the way.

A further analysis shows that, in the first half, non-performing loans to total loan ratio soared to 5.2%, coming from 3.6% at the end of financial year end 2014. This came in spite of a 6% contraction suffered in loan and advances to customers from N618 billion at the beginning of the year to N578.6 billion for the half year ended.

The Group’s cost of doing business jerked up as shown in its key performance indicator. Cost to Income ratio went up to 71.9% in the first half compare to 70.2% in the comparable period. This reflects the economic incident of rising cost of doing business but question around efficient assets deployment comes up.

As the underlying figures revealed, there was inefficient business assets usage as the Group recorded an improved low cost deposit mix to 66.5% of its total deposit from 64.8% a year ago.

Then, increased cost to income ratio may be due to overpricing and high cost of using funds.

In spite of this trend, FCMB’s total deposits from customers moved up by about 7% to N785.8 billion at the end of first half of 2015 from N733.8 billion at the beginning of the year. This feat was achieved by serving about 2.8 million customers effectively.

On revenue side, the group reported an increase of about 11% from N69.6 billion in June 2014 to N77.4 billion at the end of first half 2015.

The Group net interest income berthed at N34.4 billion, coming from N32.4 billion in the comparable in 2014. This represents an increase of 6% but was watered down by a 5% increase in operating expenses. Then, this left a negative impact on the profitability for the period.

For the group, operating expenses went up to N33.7 billion, which signify a 5% upward move in overhead, from N32 billion in the comparable year 2014. The growth in operating expenses was linked to the uptick in general prices of goods.

The bank’s profit before tax went down significantly by as much as 14% between the first half 2014 and 2015. Profit ability dropped to N9.6 billion at the end of first half as against N11.1 billion achieved in the comparable period. Its earnings per share suffered a 7 kobo reduction to 84 kobo in first half 2015 from 97 kobo in the comparable period 2014.

Although, the group banking segment loans to deposit ratio moved up marginally to 73.6% in 2015 from 73.4% in the corresponding year 2014 when compared to CBN’s regulatory benchmark of 80.0%, this lowers the bank ability to increase risk assets in 2015 at current level of deposits. The bank must increase its customers deposit base which would aid it at creating more money.

From the beginning of the year to date, FCMB Group expanded its total assets by 5% fromN1.17 trillion in December to N1.22 trillion. The trend was at the back of increased loans and advances in the six months. The bank did not engage in aggressive loan development as reflected in its lending business which grew at a slower rate.

FCMB’s Capital Adequacy Ratio (CAR) was jerked up to 19.8% in the first half from 17.6% in the corresponding period, largely due to playing down on risk assets portfolio. This comfortably placed the bank above the industry benchmark.