Big Reservations Over FCMB’s 2022 Sudden Profit Flight .
NOT YET OUT OF THE TREADMILL
When you peep hard into the interior workings of F CMB’s operational dynamics, what indeed do you see? A bank continuously depicting a picture of a corporate entity not competing for the future , with the management’s headlights not shining farther out than those of its competitors , not influential in setting the new rules of competition in the industry and less a rule maker than a rule taker within its industry ; a bank with more intent on protecting the industry status quo than challenging it ; a bank that is more active at re engineering the core processes than regenerating core strategies ; a bank with a management more of a maintenance engineers keeping today’s business than architects imagining tomorrow businesses .
. What else could have stared you in the face in a bank founded in 1982 but still crawling behind some younger tier 2 banks ? Nothing better could be seen . The list is even longer that the above observations . FCMB has been more of the concern about its ability to maintain competitiveness in the company’s traditional businesses than having confidence in its ability to find and exploit opportunities for growth and new business development ; it has been staying on a treadmill for too long for its inability to compete for the future and this has remained a point of concern ; one of the oldest banks has been been overtaken by younger banks . Sequel to this , it has been more of anxiety among its stakeholders on the bank than hope .
The proofs are enormous too. Although, it could hit a profit milestone once in a while, its progress seems to be caged sometimes; but most of time, like a prisoner shackled to the heavy steel chair , its profitability is subjected to roller coaster rides for years .In other words , when such a milestone is delivered, however ,its tradition of losing the momentum for another round of years is what is giving a lot of its stakeholders sleepless nights .
But who do blame for this sad scenario ? More than any other factors , FCMB’s journey to the front row or industry leadership is paved by the excessive influence of a powerful stakeholder t ; an organizational culture where a powerful and key stakeholder is ready to sink or swim, provided his children are at the helm . This is a major obstacle setting it up for an uninspiring run and threshold value delivery to its stakeholders .
The consequence of this is palpable: tottering fortunes and continued oscillation that manifest in its underwhelming performance ratios compared to even the younger banks . These are nothing but signals from its weak profit engine which could be traced to a strategic capability that fails to deliver and sustain the competitive advantage the bank needs to outperform competition .
A look at its financial reports over the years tells the story better , a bank that has failed to be competitive and unable to sustain strong momentum once a while it hits a profit milestone despite its age and experience advantage . At the receiving end of the above ugly scenario are the shareholders who are denied adequate returns on their investments .
The figures from the financial statements some decades past tell the story better . For some reasons similar to those highlighted above , its 2022 result which is its latest for now , is currently generating big reservations. Truly , FCMB delivered what could be tagged a milestone profit in 2022 by rallying all resources; its net profit hit N32.6 billion on the back of healthy earning assets, fast rising fees and commissions compared to N21b. in the previous year , a big relieve after some years . But the question is , could it sustain the latest result ?
MIXED FEELINGS OVER 2022 RESULTS
The disposition of its stakeholders to the above question takes different dimensions. To the bank ,the result worth the celebration galore it is currently generating ; of course yes , the reason for this may not be far to seek . First, the management has succeeded in breaking the jinx of cyclical profitability debacle since 2014 . In that year , the bank hit N22billion but since then until the latest results , the bank could not hit that peak again . Moreover , it is another opportunity for the management believed to be asleep at switch to prove it has awaken from its slumber .
But some other stakeholders could not accept that dummy and are not in the celebration mood . For them ,it is once bitten twice shy considering the negative impacts of the past scenario ,particularly between 2014 and 2022 . The bank inability to lift its profitability impressively vividly reflected in its Net profit margin ,a ratio of net profits to revenue for a company ; net profit margin which illustrates how much of each naira in revenue collected by a company translates into profit ranged between 3.12% ,8.13% ,5.54% ,8.45% and 9.57% ,indicating the bank was getting less than 10k from every N1 made at revenue turned to profit . The implication of the miserable net profit margin could be seen on what goes to each shareholder per share of the bank’s stock as earnings per share and ultimately as dividend .
A big error ,which many shareholders will not forget in a hurry , was an unnecessary optimism surrounding its 2014 full year results . In 2014 , when FCMB hit 22billion , many analysts had looked towards the bank’s next profit milestone and believed it would be sustained ; some had invested in the bank’s stock based on that performance , but it was a total miscalculation .
Unknown to the victims of its miserable performance , the so called outstanding N22b profit which generated much hope and expectations might be unconnected with its extraordinarily strategic capability or outstanding profit engine authored by the bank’s management as some wrongly believed then . Rather , it was as a result of the synergistic value of its takeover of the rested Finbank , some analysts noted .
This view could be supported by facts and figures . FCMB completed the acquisition in February ,2012 and subsequently merged with it October the same year . The same year that acquisition was consummated, its profit took a northward drive and hit N15b compared a N7b loss a year before ; in 2014 again , a profit after tax of N22b was registered to consolidate the previous year performance of N16b in 2013 .However , when that one-off benefit of the acquisition was exhausted , its profit engine collapsed again .
Those who believed otherwise paid dearly for it . For almost a decade , FCMB’s profitability engine lost its momentum and the bank could not hit that peak until 2022 ; since 2014 ,its bottom line had been besieged with the inconsistency . For this ,the bank could not pay any competitive dividend neither were the shareholders compensated with capital gain from stock’s price appreciation.
Should the bank be held responsible for the magnitude of the loss suffered by those shareholders ? Yes, the bank should be blamed for it . But even with that judgement , some analysts still believed those who fell victim of FCMB miserable non performance are victims of their own culpable ignorance . First , FCMB had never been competitive, though it had survived some stormy industry circumstances that some others failed to survive . But it rarely pulled weight among the industry’s leaders ; yet it had been around before the likes of Zenith Bank and Guaranty Bank that have for long remained tier 1 banks . Even among tier 2 banks , it has never positioned itself as a bank competing for the future or one that desires to rewrite the rules of the game or unafraid of orthodoxy and become their leader.
FEARS OVER SUSTAINABILITY : WHEN THE PROFIT ENGINE NOT YET RECONFIGURED
If the 2014 profitability milestone could be attributed to the synergistic advantage of its acquisition of the then rested Finbank as indicated above , this latest sudden flight in its profit is believed to more of another one-off or circumstantial advantage , indicating it may not be sustainable .
Despite the said flight in its profit in 2022 , some analysts are associating the jinx breaking profit to the prevailing high interest rate environment in 2022 driven by incessant jerking up of the monetary policy rate by the regulatory authorities for which the banking sector is a beneficiary and by extension FCMB. In the financial year 2022, the Central of Nigeria , CBN , jerked up substantially its Monetary Policy Rate ,MPR, from which banks are bound to benefit . From 11.5 per cent in January, 2022 , the Central Bank of Nigeria Monetary Policy Committee in November 21 and 22, 2022 raised the monetary policy rate to 16.5 per cent
The reason is that the banking sector’s profitability increases with interest rate hikes . Interest rates and bank profitability are connected, with banks benefiting from higher interest rates ; when interest rates rise, so does the spread between long-term and short-term rates, helping banks since they borrow on a short-term basis and lend on a long-term basis.
To exploit the above opportunity , in the face of higher rate environment , boosting loan growth is usually the route taken by many players to take advantage of higher regulatory rates and boost revenue as the funding cost does not gather similar momentum. FCMB took extra care to rev up its loans portfolio to achieve the above results, as the item jumped by 12.3 percent to N1.194 trillion from N1.064 trillion achieved in the previous financial year.
Financial experts believe , in a moment like this , the banking sector’s profitability usually increases with interest rate hikes. This is sequel to the fact that increases in the interest rate directly increase the yield on earning assets and the proceeds go directly to earnings. But interest rate does not rise forever , what could sustain this benefit is each player’s robust profit engine or strategic capability ; this is a feature that helps it to create value , to outperform its competitors and sustain that performance and not only a circumstantial opportunity like high interest rate environment .
The first threat to the opportunity created by the high interest environment was the rising inflation . Though the credit growth and rising interest rates have the potentials to bolster a bank profits, inflation too threatened to erode its cost bases just as provisions for potential economic stress present an added challenge . These were the decisive factors in 2022 and these exposed how robust or otherwise each bank’s profit engine was in 2022 ,including FCMB. In other words , what defines the chances of exploiting the opportunities of a higher rate environment and ultimately the sustainability of the 2022 profit for FCMB is majorly its strategic capability .
But has FCMB reconfigured its past profit engine to help leveraging its strategic capability to sustain the good results of 2022 ? That is the question whose answer is needed to know whether its current profit is sustainable . A good answer to this question could be gleaned from how the live up to its stakeholders critical success factors in 2022.
. In a banking business , liquidity , asset quality , profitability , solvency and capital adequacy ratio are critical success factors particularly valued by the stakeholders . Since these critical success factors differ from one segment to another and different stakeholder groups value different service features , organizations will need to compete on different bases and through different resources and competences .
In the financial year 2022 , a detailed analysis of the FCMB’s book , no doubt, shows the bank ,indeed, satisfied all the stakeholders threshold requirements as its deposit and loan increased , meeting regulatory authorities minimum on non performing loan ratio and capital adequacy ratio and the shareholders to a great extent, particularly by boosting its profit heavily.
However , since banks exist primarily to give adequate returns to their shareholders , unlike other critical success factors highlighted above , delivering a threshold value to survive is not enough in profitability ; this is where FCMB is expected to excel , outperform and sustain performance . By its latest results , the bank in still under performing some younger banks and the chances of sustaining the latest performance is still doubtful when certain fundamentals that deliver the 2022 results are considered .
Two facts support this view . First , its performance in the core banking is not yet competitive; two, its cost to income ratio is still high . In banking business , risk taking ,which is its fundamental nature and which is inherent in the maturity transformation remains unchanged as a decisive factor in bank’s competitiveness . In other words ,banking is no more than managing risks, the risk of mismatches between assets and liabilities and between borrowing and lending rates . A primary challenge is the ability to lend profitably and safely two elements driven by internal fund pricing and risk management .
These are what determine each player’s strategic position, and unfortunately this is where FCMB had particularly failed to prove itself . This battle was not over yet in 2022 . In spite of the potential advantage of the prevailing high interest rate environment and the so called big profit , a detailed analysis of 2022 results shows the bank is still yet to dig itself out of its threshold status .
First , large sum of money that could have gone to its net income was still set aside for its loan loss impairments charges in 2022 , indicating the bank is yet minimize the negative impact of its credit risk debacle on its net profit . Its inability to outperform its closest rivals in 2022 is due mainly to increased loan loss impairments from N15b to N24b.
Even with the challenge of its interest rate risk , though has been tamed to a large extent ,when the bank is compared with some of its closest rivals, it is easy to conclude that it is still finding it difficult to lend profitably and safely, a strong indicator of a skillful and astute banker . In 2022 , its interest income or the earnings from interest based assets including loans and advances marched upwards by 34.5 percent to N217.99 billion from N162 billion in the period under review. This is as the eroding power of interest expenses took a fierce leap of 37.2 percent to N97.58 billion from N71.12 billion.
Not only the above . A bank is not expected to be profitable at any cost , it is expected to be efficiently doing that to deliver value for money competitively for its shareholders ; its relatively high cost to income which is one of the challenges that denied the bank’s ability to sustain the 2014 profitability milestone is still a source of anxiety surrounding the sustainability of the latest impressive performance and the hurdles before it . FCMB ‘s cost to income ratio is still above 60% ,indicating its profit machine is not yet efficient ,a situation that makes it difficult for it to outperform its rivals and much impossible give its shareholders adequate return on its investments .
Between 2014 and 2022 , the same things hunted the management of FCMB and in 2022 they remained hard nuts for it . It was a tug of war for management whose capability was put to test .
A good tracking of the progress between these periods of FCMB , indicated much of the management efforts were targeted at digging the bank out of a huge pile of non-performing loans. At the end of September 2019, the bank provided for the sum of N7.8 billion as impaired loans for its financial year as against N14.6 billion for the same period in 2018 . Between 2016 and the third quarter of 2019 , the bank recorded a total impaired loan of about 71.9 billion, with 2016 being the highest with about N35.7 billion only.
Though , its non-performing loan ratio is now within the minimum regulatory requirement of 5% , this is as a result of the constant cleaning up of its books to jettison its toxic loans .
What looks like a recurring decimal in its operations of the bank was the management’s ceaseless efforts at weeding off non-performing loans . With this , several aspects of its balance sheet and indices remained underwhelming. A cursory review of its results shows how poor its financial ratios were then . The bank’s cost to income ratio was one of the worst in the industry. Its cost-to-income ratio, a measure of the costs of running a company in relation to its operating income between 2015 and 2019 ranged between 79.00% ,56.30% ,67.80%,70.70% , 69.40% to 69.30% in 2019 . In 2022, it is 63% compared to 69% in the corresponding period of 2021.
Although in 2014, FCMB’s profit after tax was N22.1 billion , inconsistency besieged its bottom line since 2014 . It went down to N4.8b in 2015 , rose to N14.3b in 2016 and down N9.4b in 2017 ; it increased to N14.9 billion at the end of 2018 , N17.3b in 2019 , N19.6b in 2020 and N20.6b in 2021 Overall, this indicated its inability to beat its 2014 records .
From the above review , definitely the FCMB’s leopard has not changed its spot . FCMB has remained a threshold bank surviving on the treadmill . This is also very clear from its balanced sheet size and profitability relative younger banks like Fidelity and Stanbic
SURVIVAL STRATEGIES OF FCMB
To sustain itself in the industry , it has only engaged in restructuring and re engineering as it is confronted with competitive problems of stagnant growth, declining margins and falling market share.
Unfortunately , its top management probably has forgotten that a company that succeeds at restructuring and reengineering but fails to create the markets of the future will find itself on a treadmill, trying to keep one strong step ahead of the steadily declining margins and profit of yesterday’s businesses. This ,indeed, has been the fate of FCMB, one of the oldest banks in Nigeria .
The only assurance its shareholders are demanding is better management that could sustain the momentum of the current profit engine and remove the bank from the treadmill .
For any corporate entity with a laggard status to upturn the table , it must be less interested in protecting the past ,more keen at creating the future , must not take industry structure as a given and ready to challenge the prevailing conventions. In other words , it must think like a champion that knows the race to competition is or should be perceived as a race to build competencies not simply to gain immediate market share through restructuring and re engineering.
One thing that may not allow FCMB to take the above lame is the spirit of family business and its alleged attendant undue influence of a key stakeholder with maximum power and interest to maintain it as a family property despite its public limited liability status .
This may not be farfetched .This emotion has sent similar corporate entities to their early grave both internationally and locally .
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