FCMB expected to sustain profit growth despite rising loan loss expenses

First City Monument Bank (FCMB) is expected to sustain growth in profit for the third year at the end of 2014 after returning to profitable operations in 2012. The bank succeeded in defending profit margin year-on-year at the end of the third quarter in September in spite of devoting an increased proportion   of revenue to loan loss expenses during the period. While profit margin went down from the second quarter position, the bank is quite ahead of the closing mark in 2013.

The gain in profit margin plus a continuing growth in revenue will be key to improved earnings report expected from FCMB in 2014. The bank’s management has maintained stable growth in revenue over the years and that record is expected to be maintained for 2014. With the improvement in profit margin, it shows the strength to achieve accelerated growth in profit in 2014 against a moderate improvement in the preceding year.

The bank reported an after tax profit of N14.27 billion at the end of its third quarter operations, which is an increase of 12% year-on-year. Based on the third quarter growth rate, the full year outlook indicates an after tax profit in the region of N18.7 billion for FCMB in 2014. This will be an accelerated growth of almost 15% from the improvement of 5.8% in the preceding year. The bank reported an after tax profit of N16 billion in 2013. Profit growth is therefore expected for the third year running since the bank closed with a loss of N9.9 billion in 2011.

Gross earnings amounted to N106.70 billion at the end of the third quarter, 10.4% up on the corresponding figure in the prior year. Gross income is estimated at N143.2 billion for FCMB for the 2014 full year based on the growth rate in the third quarter. This will be a continuing stable growth, which the bank has maintained over the years. It ranks higher than industry average number on asset turnover – the strength to convert assets into revenue.

Net profit margin declined from 13.9% in the second quarter to 13.3% in the third but slightly improved from 13.2% year-on-year. It still makes a better reading than the net profit margin of 12.2% at which the bank closed its 2013 operations. Despite the improvement, FCMB ranks low on profit margin on the banking industry scale. It stands one and half times below GTB’s net profit margin of 33.5%, one-half of Stanbic IBTC Bank’s 26.7% and Zenith Bank’s 26% at the end of the third quarter.

The difference in the bank’s cost-income structure is operating expenses, which accounts for nearly 46% of gross earnings. This is against GTB’s operating cost margin of 34.2% and Zenith Bank’s 41.1% at the end of the third quarter. Further incursion into revenue came from loan loss expenses, which grew far ahead of revenue during the review period. The increase of 30% in loan loss expenses the major movement in the bank’s income statement in the third quarter. From the opening figure for the year, the bank’s net credit portfolio had expanded by 58% to over N565 billion at the end of September.

Despite the high growth in loan loss expenses in the third quarter, the full year position is likely to be a drop based on the third quarter growth rate. Loan loss provisions grew by over 165% between the third and final quarter of last year. Unless the pattern is repeated in 2014, the provisions are expected to drop at the end of the year, which informs the gain in profit margin expected at full year.

One favourable cost behaviour moderated the impact of loan loss expenses significantly and that is interest cost. Interest expenses increased marginally at 3% against an increase of 12% in interest income, leading to a rise of 19% in net interest income. The proportion of gross income devoted to interest expenses declined at the end of September from 35.6% to 33.2% year-on-year.

The bank earned 72 kobo per share at the end of the third quarter against 67 kobo in the corresponding period of last year. Based on the estimated profit for the bank at full year, earnings per share is expected to come to 94 kobo for FCMB in 2014.This will be an increase from 81 kobo reported in 2013 from which the bank paid a cash dividend of 30 kobo per share.