Currency devaluation, a boon for FCMB as earnings spike

The adoption of a flexible exchange rate policy by the Central Bank of Nigeria (CBN) is proving a boon for First City Monument Bank Plc (FCMB) as the lender’s earnings surged in the third quarter.

Experts say the bank’s good assets quality, strong earnings and efficiency makes its shares attractive to investors.

For the first nine months through September 2016, FCMB’s net income surged 597.84 percent to N12.98 billion from N1.84 billion the previous period, according to results published in on the website of the Nigerian Stock Exchange (NSE).

The growth in profit was supported by a 612.95 percent upsurge in foreign exchange revaluation gains to N35.34 billion. Gross revenue also increased by 28.78 percent to N140.72 billion while interest income was up 6.68 percent to N93.23 billion in the period under review.

Non-interest income spiked by 128 percent to N44.8 billion, for the nine-months ended September 2016 while profit before tax surged by 453 percent to N14.20 billion. 

Banks in Africa’s largest oil producer have benefited from currency devaluation.

Zenith Nigeria Bank, First Nigeria Bank, and GTBank Nigeria Plc recorded revaluation gains of N31.01 billion, N68.40 billion and N93.64 billion that helped bolster profit.

Nigerian central bank in June adopted the flexible exchange rate that saw the naira lose 40 percent of its value against the United States currency.

FCMB’s risk management strategy has paid off as Non Performing Loans (NPLs) fell to 3.40 percent in the period under review as against 5.80 percent the previous year amid a severe dollar shortage causing credit crunch.

The bank in its investor presentation said it took advantage of CBN’s circular that allows for write off of loan balances which reduced NPL by 27.4 percent.

FCMB’s cost to income ratio (CIR) fell to 50.30 percent in September 2016 as against 73.90 as at September 2015, which means the lender has minimized expenses while increasing profit. Operating expenses were down 3 percent in the period under review.

“The audited nine months results for the period ended September 2016, reflects our focus on key soundness ratios and the need to maintain buffers against a sustained adverse operating environment, said Peter Obaseki, managing director of FCMB Group Plc

“Accordingly, capital adequacy and liquidity ratios have held up at 17.6% and 36.8%, respectively. Underlying revenue momentum remains strong while cost optimisation programme led to a 2% YoY drop in operation…… the macro economic conditions in the final quarter remain challenging; we will keep up a conservative stance.” said Obaseki.

Indeed 2016 is a challenging year for banks in Nigeria as an economic downturn caused by a sudden drop in price of oil hindered customers from paying back interest on loans owed to bank. Delayed salary payment also soared loan loss expenses.

Because firms in the oil and gas industry are unable to meet their obligations because collateralize assets got beaten down as oil price dropped, banks NPLs swelled.

Nigeria economy contracted by 2.2 percent in the third quarter, according to a recent report by the National Bureau of Statistics (NBS). The IMF forecasts that the GDP will contract by 1.70 by 2016, the worst recession in 25 years. Inflation rate rose to 18.30 percent in October, the highest in 11 years as high gasoline and food price squeezed consumer wallets.

Moody’s Investors Service said on that Nigeria’s five biggest banks share common credit challenges related to the economic slowdown. Moody’s expects non-performing loans to increase to about 12 percent over the next 12 months.

The ratio of non-performing loans to total credit rose to 11.7 percent at the end of June from 5.3 percent at the end of 2015, the Abuja-based Central Bank of Nigeria, which requires banks keep the measure below 5 percent, said in a report on its website.

Despite the adverse operating environment, FCMB’s earnings per share EPS increased to 87k in September 2016 as against 67k the previous year. Net Interest Margin moved to 8.4 percent in the period under review compared to 8.3 percent at September 2016. 

FCMB’s loans and advances were up 10.82 percent to N657.12 billion in the period under review as against N592.95 billion the previous period. Deposit to customers fell by 5.12 percent to N664.30 billion in September 2016 compared to N700.21 billion as at September.

The bank said the decline in customer deposit QoQ due to affinity for high yield money market funds.

“Continuous initiatives to further optimise the balance sheet necessitated shedding some CRR-linked deposits,” said the bank.

FCMB’s total assets increased by 7.80 percent to N1.24 trillion in September 2016 from N1.15 trillion the previous year. Capital Adequacy Ratio fell to 17.6 percent in 2016 as against 18.3 percent last year.  Liquidity Ratio stood at 36.8 percent in 2016 from 35.8 percent for September 2015.  Loan to Funding Ratio increased to 67.6 percent as against 65.1 percent as at September 2015.

“The audited results of the bank reveal that the extraordinary performance of Q2 2016 offset the loss recorded in Q3 of N2.4 billion, thereby resulting in strong year on year profit growth of 913%. In order to avoid an unsustainable, non-cash, spike in earnings from further revaluation gains in Q3, the bank also significantly stepped up its loan loss provisions.

The macroeconomic climate is taking a significant toll on the bank’s borrowing customers across all segments. Accordingly, the bank will maintain high provision coverage ratios (currently 131%), continue to strengthen our capital adequacy ratio (currently 16.9%) and our liquidity ratio (currently 36.8%). While our prudential ratios should continue to strengthen into Q4 (modestly buoyed by a tier 2 capital injection of N7.5bn in November), we do not anticipate improvement in the fourth quarter earnings. Nonetheless, we are pleased with the gains we continue to record in growing our business in areas such as retail banking (with a 315% YoY growth in profitability) and increasing our share of banking activities in the agricultural sector.

In spite of the fact that we have seen several revenue lines diminish due to external factors – as we build a more resilient balance sheet, we will be well positioned for a strong rebound in core earnings in the medium term.” said Mr. Ladi Balogun, Group managing director of FCMB Ltd.

BALA AUGIE