FCMB Needs Further Upturn In Q4 To Head Off Profit Drop.

First City Monument Bank [FCMB] recorded the first improvement in revenue and profit in 2021 financial in the third quarter ended September. Its management needs to sustain the upturn in the final quarter – which is critical for the bank closing the year on the side of positive profit growth.

Despite that profit growing by 43 per cent quarter-on-quarter to N6.2 billion in the third quarter, group profit still closed slightly down year-on-year at N13.8 billion at the end of the period. The third quarter leap nevertheless gave the bank a great millage that levelled up a 22 per cent drop in profit at the half year.

The bank’s profit figure for the third quarter accounts for over 45 per cent of the group profit at the end of the third quarter. A similar leap in the final quarter is quite critical for the bank to head off a profit drop for the 2021 financial year.

The bank needs to generate a minimum of N5.8 billion in after-tax profit in the final quarter to keep after-tax profit flat with the N19.6 billion it posted at the end of 2020. The challenge in growing profit in the just concluded financial year stems from an unhealthy balance between interest income and expenses.

At the end of the third quarter, interest expenses were growing well ahead of interest income – which constricted margins. The bank improved interest earnings by 3.3 per cent to N115.7 billion at the end of September while interest expenses rose by 14.3 per cent to over N50 billion over the same period.

The growth disparity increased in the third quarter with interest expenses rising by close to 56 per cent quarter-on-quarter to account for 41 per cent of the nine-month figure. This is against an increase of about 20 per cent in interest income quarter-on-quarter over the same period.

This is in line with our warning at the end of half-year operations that “developments to watch on FCMB in the second half of the year include a good chance that interest expenses could grow further and change the year-on-year reading from going down to going up”.

The cost-income growth imbalance squeezed net interest income, which went down by N2.7 billion or 3.9 per cent year-on-year to close at N65.4 billion at the end of September 2021.

Other major constraints on the side of earnings came from other revenue, which fell from almost N5 billion in the same period in the preceding year to less than N94 million at the end of the third quarter.

There were two major improvements on the side of revenue in the third quarter, which are net fee and commission income that grew by 40 per cent quarter-on-quarter and net trading income that more than doubled at 118.7 per cent over the same period.

The revenue gains during the quarter helped the bank to step up gross earnings from a slight increase in the second quarter to 14.5 per cent quarter-on-quarter in the third quarter.

FCMB, therefore, pulled up gross earnings from a 4 per cent decline year-on-year at half year to an increase of 2 per cent to N115.7 billion at the end of nine months of trading. This is a sustained improvement from a 12 per cent revenue drop in the first quarter.

The bank’s management supported the improvement in revenue with some cost savings in the third quarter. The biggest cost saving came from net impairment loss on financial assets, which dropped by 86.5 per cent to less than N757 million for the third quarter. This means a drop of over N4.8 billion in loan loss expenses for the quarter.

The nine-month position shows a drop of 64 per cent in net loan impairment expenses to about N4.8 billion at the end of September. This is an accelerated drop from 49 per cent year-on-year at half a year in June 2021 and also a major change of direction from over 62 per cent advance in credit loss expenses at the end of 2020.

Another big cost-saving area for the bank is fee and commission expenses that dropped against a strong growth in transactions income. Compared to an increase of over 15 per cent in fee and commission income to N25.6 billion year-on-year, fee and commission expenses dropped by 26.5 per cent to N5.4 billion.

The result is an increase of almost 36 per cent in net fee and commission income to over N20 billion at the end of the third quarter.

Through the revenue gains and cost savings in the third quarter, FCMB was able to make some progress in dealing with its challenges of revenue losses and the rising cost of funds experienced at half-year Its bottom-line position improved from a drop at half-year to flat at the end of the third quarter.

A further upturn in the final quarter will be the critical development to watch on the bank whether its recovery journey would progress or falter. The bank has been on a long recovery journey since it suffered a huge profit drop of 78.5 per cent in 2015.

Management sustained a profit rebuilding trend for the third straight year in 2020 to close at N19.6 billion for the year, still down from its peak profit figure of over N22 billion attained as far back as 2014.

The bank’s main hurdle in the final quarter will be the accelerating growth in the cost of funds that continues to claim increasing proportions of interest earnings from 35.7 per cent at the end of the first quarter to 41 per cent at the end of half-year and further to 43.5 per cent at the end of the third quarter.

There is also the possibility of the margin of drop-in credit loss expenses shrinking in the final quarter, which could squeeze margins and increase pressure on the bottom line.

The bank earned 70 kobos per share at the end of the third quarter operations, which is unchanged over the review period.

Source: Insidebusiness.ng