FCMB: Loan losses weaken profit rebound

First City Monument Bank’s breakout growth in profit in the second quarter failed to be sustained in the third and the bank’s robust full year profit expectation has thinned down. Despite the slowdown, the bank is still headed for a major rebound in the 2016 financial year after a 78% profit drop in 2015.

Credit losses advanced by 143% from the second quarter position and claimed 65% of net interest income at the end of the third quarter. That slashed net profit margin from 17.7% in the second quarter to 9.2% in the third and with that, the bank closed the third quarter operations with a lower profit figure than it posted at the end of the second quarter.

Revenue growth remained impressive at 29% year-on-year to N140.73 billion at the end of September but a decline in profit from N15.67 billion in the second quarter to N12.98 billion in the third follows a loss of N2.69 billion in the third quarter. The third quarter profit position remains a big turnaround for the bank from a profit figure of N1.86 billion in the same period last year. Profit was already standing at about 173% above the full year figure in 2015 at the end of the third quarter.

Apart from rising credit losses, interest expenses, which declined in the second quarter, reversed its position in the third. However the big event in the bank’s income statement so far this year remains the exceptional growth in other income from foreign exchange gains.

Non-interest income remains the revenue driver for the bank in 2016, which is exclusively driven by other income. Fees and commissions, which grew by almost 20% in the second quarter, declined by 5.6% in the third quarter but other income accelerated from a 217% growth in the second quarter to 341.3% in the third. Fee-based earnings amounted to N34.12 billion at the end of September, up from N7.73 billion in the same period in 2015.

Gross earnings stood at N140.73 billion at the end of the third quarter, an increase of 29% year-on-year. Based on the third quarter growth rate, we mark up gross income projection from N178.4 billion to N195.6 billion for FCMB in 2016. That will be an increase of 28.3% 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, a rebound from the marginal growth of 2.2% in 2015.

Interest income improved by 6.7% year-on-year to N93.23 billion at the end of the third quarter, improving from a 4.8% decline at half year. Renewed growth in key earning assets accounts for the improved performance of interest income.

Third quarter position shows the bank is sustaining the build up of the key earning assets with an increase of 18.3% in investment securities to N160.09 billion from the closing figure last year. This is the first growth of the bank’s investment portfolio in four years. A growth of about 11% in loans and advances to over N657 billion was maintained at the end of September, indicating however a zero growth in credit volume in the third quarter.

Interest expenses changed direction from a drop of 17.6% in the second quarter to an increase of 3.5% in the third. This remains a significant moderation compared with last year when interest expenses rose by 31.5% and caused a 12% drop in net interest income. This still permitted an increase of 9.2% in net interest income.

The challenge posed by loan impairment charges increased in the third quarter. The charges rose from N13.49 billion at the end of June to N34.50 billion at the end of September, already standing at 130% above the full year figure in 2015. Loan loss expenses led the cost increases that eroded profit capacity last year and are again on accelerating growth in 2016.

Operating cost remains under control at the end of the third quarter and the bank is maintaining the lowest cost margin is several years and one of the lowest in the banking sector. The revenue boost from foreign exchange gains has enabled the bank to moderate the effect of rising credit losses on the bottom line and maintain its turnaround posture.

There is still a big leap in profit capacity viewed on year-on-year basis. Net profit margin is up from 1.7% in the third quarter of last year to 9.2% at the end of September this year. After tax profit rose by 596% to N12.98 billion over the review period. It is already 173% above the full year profit figure of N4.76 billion the bank reported at the end of 2015.

Based on the third quarter growth rate, the full year after tax profit projection is revised from N31 billion to N16.4 billion for FCMB in 2016. Loan loss charges are expected to weaken profit margin further in the final quarter. Profit had dropped by 78.5% in 2015 to the lowest figure in four years.

The bank earned 65 kobo per share at the end of the third quarter, up from 9 kobo in the same period last year. It is expected to earn 83 kobo 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.