For the better part of this year First City Monument Bank’s , FCMB, stock price was sky bond.
Even currently , it is yet to lose that steam . The bank closed its last trading day (Wednesday, September 6, 2023) at 6.55 NGN per share on the Nigerian Stock Exchange (NGX), recording a 0.9% gain over its previous closing price of 6.49 NGN. It began the year with a share price of 3.85 NGN and has since gained 70.1% on that price valuation, ranking it 46th on the NGX in terms of year-to-date performance.
Yet analysts’ are still hopeful ;they believed shareholders can be optimistic about FCMB knowing the stock has accrued 6% over the past four-week period—39th best on NGX.
The above scenario should not spring any surprise .Much of the bank’s northward movement, no doubt , was due to its inspiring showing last financial year which investors believed would repeat itself this current year The bank did not disappoint as in first half which ended June 30, 2023
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With the release of the half year result for 2023,First City Monument Bank ,FCMB., Nigeria’s leading second tier lender, has shown clearly where it is headed, the very top of its banking peer. The bank is making a steady move to the big time, ramping up returns and taming costs as well as leading in regulatory requirements. The rise can be pinned down to responsible banking. . The profit before tax the company reported recently for its half year was a little short of what was made in the whole of 2022. This has left investors craning to take another look at the bank’s performance; the bank’s performance is a harbinger year of a juicier outing in the 2023 financial year .
In the first six months of the current financial year, it rode the wave of the prevailing high interest rate environment and currency devaluation to stash a respectable profit figure.
All could be traced to the Central Bank of Nigeria, CBN, efforts move to put the economy on the right track . The apex bank has continued to raise its benchmark interest rate, the Monetary Policy Rate, MPR, in the last few years to control inflation .In July,2023 again, it was jerked up to 18.75 per cent in a bid to curb inflation. The increment in the month of July was the seventh consecutive time since April 2022, to 18.75 per cent, representing a 25 basis points increase from the previous level of 18.50 per cent
The annual inflation rate rose for the 19th consecutive months to 22.79 per cent in June, the highest in 17 years, reflecting continued increase in prices of goods and services across the country. The hawkish stance, which mirrors global trends, is premised on cooling inflation that inched up marginally by 0.1% to 21.9% in February and protecting the naira’s peg to the US dollar as the Federal Reserve shows no sign of letting up its tightening stance.
But the above policy action of the CBN targeted at taming the scourge of inflation was like a double edged sword against the banking industry . Interest rates and bank profitability are connected, with banks benefiting from higher interest rates. When interest rates are higher, banks make more money by taking advantage of the greater spread between the interest they pay to their customers and the profits they earn by investing. But it is not a one way issue , it could equally increase the funding costs: This is because banks need to raise capital to fund their lending activity, and rising interest rates can also increase the cost of borrowing for banks. This can put pressure on banks’ profit margins and dampen stock prices.
FCMB’s leadership was not oblivious of the above facts .The bank jerked up its loan portfolio, asset base and shareholders’ funds. It deployed more loans to the tune of N1.5 trillion in 2023 from N1.1 trillion in 2022 ,an increase of 37% , making its loan deposit ratio to increase slightly to 61.9 % from 60.3% ; its total assets had to increase by 24.7% to N3.72 trillion from N2.98 trillion and its shareholders funds by 24.9% to N345b from N276b to exploit more opportunities created by the high interest rate environment .
However ,while credit growth and rising interest rates have the potential of bolstering bank profits, inflation is equally threatening to erode their cost bases, and provisions for potential economic stress present an added challenge
In spite of the above dilemma ,the results show FCMB powering on all cylinders to up earnings and buoy profit ;practically all other performance metrics looked up in the first half of a year .
On the Bank’s top line, Gross earnings led the upswing. FCMB helped that growth by an impressive showing within the banking sector, muscling 89 percent return to N238.2 billion from N126.2 billion
But how did the bank navigate spiralling costs prompted by the rising inflation occasioned by an import dependent economy?
Interest expense moved up 102percent from N 37.9billion to N76.7 billion while interest income had been shored only by 52% to N149billion from N98 billion to cushion that eventuality. This relationship slowed down improvement in net interest income , as it increased only by 20%percent from N60.17billion to N72.32 billion.
Net Interest income is the live wire of a deposit money bank as it is the mirror of the bank’s ability to perform its maturity transformation function. That is how the bank is able to manage short term and long term interest rates to yield good returns and ultimately affects its bottom line. But the damage from the above due to a growth in average earning assets by 22% manifested by a marginal decline in Net Interest Margin YoY to 7.2% from 7.3 in the previous year
Its interest expense was not the only potential spoiler, loan loss impairment charges connived to frustrate the management’s frantic efforts to drive the bank to the front seat .Impairment charges grew by 373 % YoY on the back of increased provisions on risk assets hitting N47b from N10.7b
Though the expense items from interest income segment and the loan loss impairment charges moved up, a sizable non interest income tempered the atmosphere. In a bid to yank up bottom line it would be necessary to tame costs especially in an environment where the cost of doing business is perpetuity; nibbling the fat off hard earned returns
Its non-interest income grew by 262% YoY and aborted the plot to prevent the management efforts at lifting the bank’s fortune beyond any imagination .But the biggest contribution came from foreign exchange revaluation gains N50.99b from N1.34b while income from fee and commission increased by 29% to N28.5b from N22.1b .Income from the trading segment also help to fortify the bottom line as it increased by 34% to N8,23b from N6..13b .
Operating expenses grew by 4% and 28% QoQ and YoY, respectively. ,due largely to increased personnel costs as well as general inflationary pressures. The bank’s good showing in operating income would suggest it did well in that department. Operating income leapt 87 percent to N155.9 billion from N83.2 billion while operating expenses stayed low at 24%.
The bigger rise in the operating income compared to its operating expenses is substantiated by the fall in the bank’s cost to income ratio, which dipped to 45percent from 68.6 percent in the corresponding period of 2022 .
Sequel to this , the chain of returns were all trending up in the period; operating profit margin stayed flat at 66 percent, suggesting that every naira expended yielded 66 kobo in operating profit which is impressive .
First line profit or Profit before tax improved 148 percent to N38.2billion from N 15.4 billion. But the PBIT margin inched up by 4 percentage point to 16.1 percent from 12.2 percent.
while net profit swung up 159 percent from N 13.7 billion to N35.4 billion, net profit margin stepped up from 10.8percent to 15 percent
To cement its place profitability 1H 2023 RoAE grew to 22.9% from 11.1% in prior year a YoY growth of 106% as a direct result of growth in profitability while its Return on Average Assets increased from 1.2% to 3.1% , an increase of 158% o
Similarly, the bank’s total assets grew by 40per cent, from N 2.7 trillion in the preceding year to N3.7 trillion in 2023; while shareholders’ fund grew marginally by 0.5 per cent, from N 275.88 billion in 2022 to N344.56billion in 2023. \
For such weighty shareholders’ fund, it is natural to pull in heft deposits as total deposits grew 45 percent to N2.4 trillion from N1.6trillion.
But the bank’s ability to meet and surpass regulatory guidlines that was another highlight of the half year results. Though the cost of risk grew to 5.9 per cent as against 1.9% per cent in 2022 the bank’s balance sheet was robust as the loan to deposit ratio, liquidity ratio and capital adequacy ratios were 61.9 per cent, 36.5% per cent and 16.4per cent respectively, all well above the regulatory threshold.
The bank’s non-performing loans ratio, however, increased marginally to 5.2per cent in 2023 from 4.6 per cent in 2022.
However , the management is expected to work on the the bank’ for a robust risk management framework and ensure that the cost of risk which increased to 5.9 per cent in the first half of this year to 1.9 per cent in 2022 is prevailed upon . This was due to the increase in impairment charges by 373per cent, N46.35 billion, compared to N9.8b in 2022 , . But kudos to the management for the coverage ratio increased by 143.4 per cent from 97.9% per cent over the same period, an indication of prudent disposition consistent with the bank’s known record of excellent credit risk management.
Speaking on the performance for that financial year, the management assured shareholders of the bank’s commitment of continuing to deliver superior returns in the years ahead. FCMB remains a clear leader in the digital space, with several firsts in the deployment of innovative products, solutions and an assortment of alternative channels that ensure convenience, speed and safety of transactions. “To continue to cater to the varied appetites of our customers in a constantly changing world and stay ahead of the competition, therefore, we have invested massively in new technologies and innovative solutions in the last financial year. This is geared towards ensuring that we continue to provide best in class quality services that create value for all our stakeholders,” he said, noting that Zenith Bank made significant progress in the adoption and integration of sustainable banking principles into its business, especially in its credit administration process.