FCMB: Key Metrics Worsen as Debits, Funding Pressure Prompt Profit Meltdown
FCMB Plc key performance indicators worsen in the first half of 2021 as lender’s weak appetite for loan pressured profit at the time Nigeria economy expands significantly. Nigeria’s low-interest rate environment has reduced net interest margin but the Central Bank requires lenders to create more credits to drive growth in the real sector.
In a messy earnings meltdown outturn despite a strong economic recovery in Nigeria, FCMB group profit for the first half of the year tumbled more than 28%, from N9.7 billion in the first half of 2020 to N7.556 billion. In its earnings forecast for the fourth quarter of 2021, FCMB is expecting to deliver N8.51 billion on gross earnings projection of N48.22 billion.
Its net operating income is expected to berth at N35.921 billion, from which operating expenses amounting to N20.402 billion would be subtracted as the group also plan to book more than N6.2 billion impairment charge on credit losses.
Reacting to the bank profits slump, growing numbers of equity analysts and investment bankers have downgraded forecasts for the year while management deems it fit to lower guidance for 2021.
FCMB group is dragged from both ends, CardinalStone Securities said in a mid-year outlook for 2021. Following its leadership fiasco, its new Chief Executive, Yemisi Edun, has a lot to do to sail the bank ashore.
Edun’s corporate strategy skills set will be put to an acid test in the latter part of the year as FCMB profit has been negatively impacted and analysts are projecting low earnings beat for the year.
At 81.96% free float on the Nigerian Exchange, shareholders dividend expectation for 2021 could be dragged as the need to boost capital position is key to operational improvement.
In the first half results, the group profit slumped double-digit due to pressures from the sterilised funds from failing to meet the CBN 65% loan target, a slowdown in trading gains as a result of naira devaluation and weak margins from interest yielding assets.
Specifically, analysts hinted that the bank’s continuous failure to meet the Central bank loan to deposit target of 65% has become a burden on the result as FCMB see serial debits in addition to what analysts call cost inefficiencies.
Cost to income ratio expanded significantly as FCMB turns to the interbank market to shore up the funding gap due to the negative impacts of the CBN penalties on the bank’s cash position.
Overall funding costs however decline following the monetary policy accommodative stance on the economy, as Nigeria’s drive low interest rate environment. This has directly impacted the fixed income market where banks seek additional income apart from lending.
The financial services industry’s margin on lending and yield from investment securities have been grossly affected due to low-interest rate environment as CBN keep the benchmark interest rate at 11.5%.
FCMB is caught in the web, just as income from assets under management face similar pressure and low foreign currencies position keep the bank out from benefiting from FX gains to drive results – similar pattern among Tier 2 capital lenders.
The bank’s return on equity printed at 7.54% in the first half, a 175 basis point or 1.75% decline compared with a 9.29% record in the comparable period in 2020.
While the bank increased borrowings to balance the gap in the balance sheet, its assets yield broke from 12.80% in the first half of 2020 to 10% at the end of the first half of 2021.
In the last 12-month, the bank’s return on assets has fallen below 1% as earnings per share slowdown to 38 kobo from 49 kobo last year.
FCMB Group Plc is currently valued at N59.012 billion in the Nigerian stock market, traded at N2.97 at market close on Monday. Broadstreet analysts show no love to the lender’s stock as mood swings keep the ticker outside buy ratings.
Effectively, few equity analysts that represent various investors’ interests in the market would bid for the stocks as they are either guiding sell or advising clients to be neutral on the stocks.
The pressure facing the group’s earnings include rising funding costs and steep operating expenses in addition to heavy rivalry as banks jostle for customers’ wallets amidst economic tightening.
FCMB maintained a low appetite for lending, falling behind the Central Bank of Nigeria’s 65% loan to deposit ratio, putting a burden on funding due to cash reserves ratio debits.
Reversing its low appetite for credits creation, FCMB increase the number of loans extended to customers in the first half by 24.5% but this could not save the day, interest income on the loan portfolio jumped 5%.
Unfortunately, non-loan related interest yielding assets fall through in the period. The financials show that interest income from investment securities placed by the bank in the period sloped downward, dropped about 56% when compared to the previous year.
Some analysts report on the industry expect this as the CBN tightening on interest rate has forced banks to look elsewhere for improving the bottom line as blue chips companies offloading expenses financing sources.
It was noted that FCMB did a lot with e-banking and other non-interest income earnings sources as the world edges forward in digital financial services. In spite of the bank’s efforts, gross earnings declined by 4.02% year on year to N94.23 billion.
This was attributed to a 4.57% slowdown in interest income driven by a severe drop in income from investment securities. FCMB had reduced its portfolio investment in the year.
“We note that the decrease in the stock of investment securities by 18.59% year to date was mainly responsible for the decline in investment income given that investment yields generally trended higher during the period”, analysts at Meristem Securities said in a report.
The decline, according to Broadstreet analysts, was a result of the need to pro-rate funding for various business interests of the group given persistent cash reserves ratio penalties for failing to meet the CBN loan to deposit ratio.
For CardinalStone Securities, FCMB share has no upside potential as analysts in one of the leading investment firms guided sell on the ticker. The firm thinks the bank’s share is relatively overpriced against its 12-month price target of N2.55.
Meanwhile, FCMB is quoted at N2.97 after it had peaked at N3.03 a share in the last 7 trading sessions at the local bourse.
In its second half of 2021 outlook, CardinalStone captioned FCMB as being dragged from both ends, saying the recent announcement of the acquisition of a 60% stake in AIICO Pensions marks the completion of a critical stage of the overall deal structure.
“We expect that a full merger between FCMB Pensions and AIICO Pensions will be actualized, in line with extant PENCOM rules”, analysts at CardinalStone stated.
Management is hopeful that a definitive merger deal can be completed between the third quarter of 2021 and the final quarter of the year; assessed the deal as positive due to a more than 40.0% increase in asset under management (AUM).
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Analysts stressed the fact that FCMB Pensions has N350 billion which is expected to be consolidated with N140 billion from AIICO Pensions, saying this could bode well for the Group’s noninterest income.
“Our base case impact assessment is a potential 70- 100 basis points improvement in Return on equity post-merger… reflecting PBT contribution of FCMB’s Investment Management division, which will absorb the AIICO acquisition, seems low”
CardinalStone maintained that it is unlikely that this deal will translate into above mid-teens PBT contribution that will materially propel return on equity.
MarketForces Africa reported that FCMB Plc has completed the acquisition of AIICO Pensions as analysts expect the group AUM expected to increase by 35% to N677 billion at year-end.
The financials show that FCMB’s customer loans and advances witnessed a meteoric rise, expanded 22.48% year on year. Analysts said this is expected to continue through the rest of the year in view of Management’s guidance of a probable loan repricing in the second half of 2021.
“Management is however not so optimistic about the performance of investment income in the next half of the year”.
In line with recent trends in the banking sector, fee-based income continues to impress. For FCMB, it grew 16.75% year on year due to increased transaction volumes across digital channels.
In their separate reports, most of the equities analysts’ said they have modest expectations for interest income given the recent downturn in the yield environment, this could however improve through loan repricing.
On the other hand, analysts at Meristem Securities stated that a 32.78% decline in trading income and a 59.68% slowdown in foreign exchange gains did not come as a surprise given the increase in yield on investment securities and the relative stability on the official FX window during the period.
The combined impact of the decline in FX gains and trading income dragged non-interest income down by 2.15% year on year.
“Looking ahead, we think that electronic transaction volumes will drive gross earnings growth in the second half of 2021. Our optimism is supported by the growth in transaction volumes in the first half of 2020”.
For trading income and FX gains, analysts at Meristem expect a flattish performance in 2021, adding that although FCMB underperformed in its gross earnings, it did fairly well in cost containment.
Despite a 13.58% year to date growth in interest-bearing liabilities, the cost of funds fell to 3.40% from 4.30% in the comparable period as interest expense declined by 3.56%, a reflection of low-interest rate environment.
However, Meristem hinted that the impact of the decline in asset yield – by about 280 basis points to 10.00%- on net interest margin was stronger as it dragged NIM to 6.70% from 8.00% in the comparable period in 2020.
“We think that NIM will remain pressured in the second half of 2021 unless Management follows through with the loan repricing plan -which will need to be robust in order to adequately compensate for low investment yields”, Meristem stated.
Meanwhile, the bank impairment charges fell significantly by 48.22%, but overall cost-efficiency deteriorated as the Cost-to-Income ratio (CIR) jumped 870 basis points year on year to 78.78%.
Consequently, profit after tax dipped by 22.10% to N7.56 billion.
“We note the role of regulatory costs in driving operating expenses growth during the period, however, they will not recur in the second half of 2021, and thus we expect some improvement in cost efficiency”.
The investment firm revised downward its projected full year growth from 8.08% to 2.81% year on year to reflect the underperformance recorded in the first half of 2021, trimmed 2021 projected EPS to N1.01 from N1.06
In its equity report, Tellimer also cited the management saying that the bank was severely hit by aggressive and rapid cash reserve requirement debits during the quarter.
This development led to sourcing of funds from the expensive, short-term interbank window as Tellimer said associated interest expense from interbank funding grew 563% year on year.
Although analysts stated that a significant part of the debits was refunded towards the end of the period, putting effective CRR at 32% as of the end of the second quarter of 2021 – excluding CRR refunded as special bills – compared to the average rate of 38% in the quarter.
The group trading and FX revaluation gain down about 60% year on year given the significantly lower scale of naira devaluation compared to 2020, and the higher yield environment that limited room for massive mark-to-market gains on debt securities. Tellimer explained.
FCMB: Key Metrics Worsen as Debits, Funding Pressure Prompt Profit Meltdown