FCMB: Facts behind a second quarter rebound

First City Monument Bank’s (FCMB) operations in the second quarter was a big rebound from over 78% profit plunge at the end of 2015 and an upshot from a marginal profit opening in the first quarter. Revenue speeded up from N34.36 billion in the first quarter to N88.28 billion in the second and net profit soared from N1.65 billion to N15.67 billion during the same period. A big turnaround is in the making for the bank this year with profit already standing more than three times the full year figure by half year.

Two major factors are behind the bank’s exceptional profit show at the end of the second quarter. One is a drop in interest expenses, which turned a decline in interest income into an increase in net interest income. But the big event in the bank’s income statement in the second quarter is the tripling of other income from foreign exchange gains.

Non-interest income is the revenue driver for the bank this year, making up for the decline in 2015. Fees and commissions grew by almost 20% year-on-year to N8.82 at the end of the second quarter to reinforce other income that jumped 217% to N18.60 billion at the end of June. Fee-based earnings therefore accounted exclusively for the revenue growth the bank recorded in the second quarter.

Gross earnings amounted to N88.28 billion, an increase of 14.1% year-on-year and an accelerated growth from N34.36 billion in the first quarter. Based on the second quarter growth rate, gross income is projected at N178.4 billion for FCMB at the end of 2016. That will be an increase of 17% over the full year revenue of N152.51 billion the bank posted at the end of last year. It will also be the strongest revenue growth in four years, improving from the lowest revenue growth of 2.2% in five years in 2015.

Interest income declined by 4.8% to N60.55 billion year-on-year at half year after a sustained slowdown in the past three years. The bank’s main earning assets – loans and advances and investment securities both declined in 2015. Investment securities have been declining since 2013, which accounts largely for the weakening growth in interest income.

Half year position shows the bank is rebuilding the key earnings assets with a top growth record of 26.2% in investment securities to N170.78 billion at the end of June. This is the first growth of the bank’s investment portfolio in four years. Loans and advances were also up by nearly 11% on last year’s close to over N657 billion at the end of the second quarter.

Interest expenses dropped by 17.6% to N24 billion, which more than compensated for the decline in interest income. With that, the bank appears to have fixed a major cost area that accounted for the big profit drop it suffered last year. Interest cost had risen by 31.5% in 2015 and caused a 12% drop in net interest income.

Revenue savings from interest expenses in the second quarter enabled the bank to grow net interest income by 6.1% to N36.54 billion against the decline in interest income. With only a marginal decline of 1.6% in customer deposits, the bank reduced its average cost of funds during the review period.

A major challenge remains for the bank’s management in the area of impairment charges for risk asset losses. Loan loss expenses led cost increases last year at 41.3% to over N15 billion and it is the only rising major cost line again this year. It has surged up 260% to N13.49 billion at the end of June, already quite close to the full year figure in 2015.

Operating cost is under control with a decline of 2.7% at the end of the second quarter. At N32.73 billion at half year, total operating expenses have moderated relative to revenue. The cost margin has declined from 43.5% in the same period last year to 37.1% at the end of June – the lowest cost margin is several years and one of the lowest in the banking sector.

In all, the cost-income ratio of the bank declined in the second quarter, which saw a big leap in profit capacity. Net profit margin advanced from 10.7% in the second quarter of last year to 17.7% at the end of June this year. After tax profit rose by 88.8% to N15.67 billion over the review period. It is already 229% above the full year profit figure of N4.76 billion the bank reported at the end of 2015.

Based on the second quarter growth rate, full year outlook indicates after tax profit in the region of N31 billion for FCMB in 2016. That will be an exceptional recovery/growth of over 551% – apparently the biggest profit advance likely from the banking sector this year. Profit had dropped by 78.5% in 2015 to the lowest figure in four years.

The bank earned 79 kobo per share at the end of the second quarter, up from 42 kobo in the same period last year. It is expected to earn N1.56 per share at the end of the year compared to 24 kobo at the end of 2015.

FCMB has maintained regular dividend payment in the past three years though dividend declined from 30 kobo in 2013 to 25 kobo in 2014 and further to 10 kobo in 2015. Earnings per share is expected to rise to a new peak this year, meaning the biggest leap also in dividend capacity for the bank.