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Audacious First City Monument Bank set to claim top spot among peers

 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 

1WK 4Wk 3MO

+14.9% +5.99% +42.4%

6M 1YR YTD

+46.2% +115% +70.1%

   

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.

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