FCMB: Profit growth undermined by rising expenses

First City Monument Bank (FCMB) isn’t likely to repeat the strong profit growth it achieved last year in 2015 due to rapidly growing cost. In 2014, the bank lifted net profit by 38.3% to a new peak of N22.13 billion mainly because interest expenses declined slightly against the rising trend in the banking sector. This year, interest cost has joined the general industry trend and this has slashed the bank’s profit margin to the lowest level in four years.

The favourable operating story in respect of interest expenses in 2014 has changed drastically as per the interim reports in 2015. The bank’s profit capacity is further strained by impairment charges for loan losses, which is also claiming an increased proportion of revenue. Operating cost is however under check, which is the only major cost area in which cost saving is happening this year.

On the driving wheel of FCMB is Peter Obaseki, the bank’s managing director/chief executive officer. The man, who assumed office in 2013, achieved the strongest profit growth in five years in his first year in office. Is this good luck or good management quality is the question to which subsequent results may provide the answer.

In terms of revenue growth, the bank is doing quite well on year-on-year basis. Gross earnings grew by 11% to N77.35 billion year-on-year at the end of the second quarter. Interest income provided the strength for revenue growth and compensated for a 6% decline in non-interest income.

Based on the second quarter growth rate, we project a gross income of N158 billion for FCMB in 2015. This will be an increase of 6.3% over the revenue figure the bank posted at the end of 2014 and a slowdown from the growth of 13.5% recorded last year. Revenue growth has decelerated in the past two years from the peak growth record of 46.1% in 2012.

Revenue growth is constrained by a sustained drop in the investment portfolio in the past two years and a decline in loans and advances in the current year. At N149.42 billion at the end of June, investment securities have fallen by close to 40% from the 2012 peak. The net loan portfolio also declined by 6% to over N578 billion at the end of the second quarter from the closing figure in 2014.

The bank posted an after tax profit of N8.30 billion at the end of the second quarter, which is a drop of 13% year-on-year. If the second quarter growth rate is maintained to full year, we expect after tax profit to stand in the region of 17.5 billion for FCMB at the end of 2015. This will be a drop of 21% from the bank’s peak profit figure of N22.13 billion in 2014. It had lifted net profit by 38.3% last year, the strongest profit growth that has happened in the past five years.

Falling profit against growing revenue is explained by rising cost and two major cost elements are to blame. One is interest expenses, which grew ahead of gross earnings at 27% compared to 11% in the second quarter. The bank is devoting an increased proportion of revenue to meet interest expenses this year at 37.7% in June compared to 33% in the same period last year and 30.5% at the end of last year. Rising interest cost is a challenge that has cut across both banks and businesses in recent years.

The other cost item that is undermining profit performance is provision for credit losses, which rose by 48% year-on-year at the end of the second quarter to N3.75 billion. In the second quarter of last year, loan loss expenses claimed 3.6% of gross earnings. This year, the proportion has gone up to 4.8%.

The only favourable cost behaviour came from operating expenses, which grew less rapidly than gross earnings. At N33.65 billion, operating expenses went up by 5% year-on-year at the end of the second quarter. The moderated growth lowered the operating cost margin from 46% to 43.5 % over the review period and saved revenues for the bank.

The cost-revenue relationship at the end of the second quarter weighed heavier on the side of cost, which lowered profit margin during the period. Net profit margin declined from 13.8% in the second quarter of last year to 10.7% at the end of June. The bank closed last year’s operations with the highest net profit margin in five years at 14.9%. Full year earnings projections indicate a net profit margin of 11% at the end of 2015, the lowest since 2012.

The bank earned 42 kobo per share at the end of the second quarter, down from 48 kobo in the same period last year. We expect earnings per share of 88 kobo for FCMB at full year. This will be a decline from N1.12 the bank earned in 2014. It paid a cash dividend of 25 kobo for last year’s operations. Dividend has been regular in the past two years and the record is expected to be maintained in the current year.