FCMB: Profits Drop, As Economy Shrinks | Independent Newspapers Limited
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Company Analysis

FCMB: Profits Drop, As Economy Shrinks

Posted: Jul 18, 2016 at 4:34 am   /   by   /   comments (0)

Kirk Leigh

Growth is a major problem in6and truncated forex income.

The bank grew 1.7 percent in the 2015 financial year, which is 8 times slower than growth achieved in 2014. Figures from Bloomberg suggest the bank will shrink 40 percent by next financial year even as 2017 will have the bank bounce back to growth of 7 percent, which will again double in 2018.

Total revenue in 2015 at N149.7 billion is only marginally better than the N147.1 billion garnered in 2014, reflecting how tough business is in the economy.

Net income margin is also likely to follow a similar trajectory. At N4.76 billion, net income margin for the current year is 3.2 percent. This is expected to triple in 2016 and quadruple in 2018. The bank’s biggest gain on margins in the last eight years was 2014 when net profit margin was 15 percent.

Much of the thinning net returns may be traced to slow growing interest income which moved from N94.4 billion in 2014 to N100.9 billion in 2016, a marginal 6.9 percent rise.

Commenting recently on the declining figures, the bank CEO, Ladi Balogun, said in a statement that “the commercial and retail banking arm of the group saw a significant drop in profitability … following the impairments from two significant defaulting obligors reported in our Q3 audited results. The full year’s performance was also adversely affected by a 44% drop in foreign exchange income and a 12% drop in net interest income, largely caused by foreign exchange policy and impact of cash reserve requirement ratios till Q4.

“It would have been a loss story had the bank not driven “recoveries in the retail book, improving net interest margins in Q4 and strong fees and commissions throughout the year.”

Declining profits had an eroding effect on profitability metrics including, return on assets, return on capital and return on equity. Return on assets ebbed at 0.4 percent in the current year from 2 percent in 2014. It was 1.7 percent in 2013 and 2 percent in 2012. The drop may indicate that the bank’s assets, now at N566.6 billion is doing little to shore up profits. Assets grew by a measly 2.76 percent from N551.4 billion.

Return on capital, a metric that compares the level of profits compared to the amount of capital put in the business, also shrank to 1.4 percent from 8.7 percent achieved in 2014. It was 8.8 percent in 2013. The bank achieved 15.8 percent return on capital a decade ago in 2006.

Equity holders have had their investment shrink to 3 percent from 14.6 percent in the last financial year.

The bank recognises that “the clear and direct future challenge is to unlock more value to shareholders by tackling operational efficiencies and accelerating the pace of momentum…”

The stock which sold for N1.52 Friday, July 15 has a “hold’ recommendation by analysts. According to the Financial Times, which tracks stock performance on the Nigerian Stock Exchange (NSE), “as of July 8, 2016, the consensus forecast amongst 9 polled investment analysts covering FCMB Group Plc advises investors to hold their position in the company. This has been the consensus forecast since the sentiment of investment analysts deteriorated on January 21, 2016. The previous consensus forecast advised that FCMB Group Plc would outperform the market.

“The 9 analysts offering 12-month price targets for FCMB Group Plc have a median target of 1.78, with a high estimate of 4.56 and a low estimate of 0.97. The median estimate represents a 25.35% increase from the last price of 1.52.”

But with the falling PE ratio of the bank at 2.6x multiple relative to 3.5x multiple of the year before, investors’ expectations about the bank’s ability to earn seem to be waning while the bank seems to compensate with rising dividend yield, which is 8.9x multiple in the current year compared to the previous year when it recorded   5.9x multiples.

Improving cash flow in the financial year under review is also a confidence building move that suggests the bank is forward looking; FCMB increased its cash reserves by 43.25%, or N54.63bn. Cash flow from financing totalled N32.22bn or 21.12% of revenues. In addition the company generated N5.80bn in cash from operations while cash from investing totalled N14.62bn.

“In spite of the challenging policy and macroeconomic environment the bank…will witness a steady improvement in performance indices in 2016 as our retail and transaction banking activities continue to evolve positively, our loan recovery efforts yield results and our efficiency drive gathers more momentum”, Balogun said.