FCMB: Defending profit under tight earnings

First City Monument Bank (FCMB) faced a tight earnings situation in the first quarter of the current financial year but management appears determined to keep profit from dropping for the second year. The bank had lost 34% of its prior year’s profit in 2017 after losing more than one-half of other operating income. A continuing drop in that income line poses a major constraint to the bank on revenue growth this year.

Management’s response to a tight earnings environment is a firm hold on costs, including impairment charges on loans and advances. This has enabled the bank to raise profit by 64% from less than 10% increase in gross earnings.

The bank closed first quarter operations with gross earnings of N42.2 billion an increase of 9.7% year-on-year. This seems to present a better earnings outlook that in the preceding year when gross earnings declined by about 4% to N169.88 billion at the end of the year. Yet, based on the first quarter revenue figure, the bank isn’t expected to maintain the current growth rate to full year.

Fee and commission income provided a strong growth last year that largely countered the drop in other operating income. It is again providing the strength for revenue growth in the current year. Net fee and commission income rose by 38.8% to N4.8 billion at the end of the first quarter against an increase of 9.3% in interest income and a drop of 21% in other operating income.

The bank’s management applied effective control on costs in every area and with that, it succeeded in extracting an increased proportion of profit from all the key income lines. Interest expenses increased at a significantly lower pace of 4% year-on-year than the 9.3% improvement in interest income at the end of the first quarter.

The moderation in interest expenses permitted an increase of 14.2% in net interest income to N17.75 billion at the end of the period. Interest cost therefore claimed a reduced share of interest income at the end of the first quarter at 45.6% compared to 48% in the same period last year.

With rapidly growing inter-bank borrowings however, interest expenses could accelerate as the year progresses. Inter-bank borrowings have advanced by 128% in three months from the closing figure last year. Customer deposits, which had been down over the past three years from the peak figure of N734 billion in 2014, have however picked up to a new high at close to N748 billion at the end of the first quarter. This could enable the bank to reduce due to banks in the course of the year.

Net impairment loss on financial assets dropped by 36% at the end of last year and again declined slightly at the end of the first quarter. The decline is expected to be maintained to full year, as recovering crude oil prices lead to write back of impairment charges on oil and gas assets.

The bank is also holding a tight rein on operating cost with a slight decline in personnel expenses and slight increases in other areas. The cost saving effort resulted in nearly 71% leap in operating profit, which amounted to N3.26 billion at the end of the first quarter.

The bank’s after tax profit had dropped by 34% to N9.41 billion at the end of 2017. An increase of 64% in the first quarter is indicating that progress towards recovery can be expected this year. Net profit margin improved from 4.1% to 6.1% over the review period.

The bank earned 13 kobo per share at the end of the first quarter, up from 8 kobo in the same period last year. It earned 48 kobo per share at the end of 2017 and paid a cash dividend of 10 kobo per share on 30th April, 2018.