Analysis: FCMB is running out of time

Last week, FCMB closed the week as one of the worst losers, shedding 9.45% of its value. Investors, who had waited weeks for its 9 months quarterly results had a bone or two to pick with the tier 2 bank.

If you have been tracking the progress of one of Nigeria’s oldest financial institutions FCMB, then you would be familiar with its efforts to dig itself out of a huge pile of non-performing loans. As at the end of September 2019, the bank reported that it had provided for the sum of N7.8 billion as impaired loans for its financial year.

By this time last year, it was N14.6 billion, so a near 50% improvement will always be welcomed, but not if you look back at how far they have come. Since 2016, the bank has recorded a total impaired loan of about 71.9 billion, with 2016 being the highest with about N35.7 billion only. The balance sheet mending efforts have recorded relative successes, especially in a harsh economic environment. The bank’s capital adequacy ratios are 17.9% higher than the regulatory required 15%. Liquidity ratio is also at 39.8% and the loan to deposit ratio at 73.9% (CBN loan to funding ratio is 57.36%).

Whilst the bank contends with weeding off non-performing loans, several aspects of its balance sheet and indices remain underwhelming. A cursory review of its much-awaited 2019 9 months results shows just how poor its financial ratios are. The bank’s cost to income ratio of 75.4% is one of the worst in the industry. It’s either it aggressively reduces its bloated overheads or grows income faster and more robustly. The former is perhaps a more plausible route.

Return on average equity was a mere 5.8% at a period when big players in the industry are raking in double-digit returns on equity. Its 2019 9 months results also performed worse than in the same period in 2018, with pre-tax profits down 13.3%. The bank blames exceptional items as the reason for the profit decline.

“Our year on year growth has faced a few setbacks due to the non-recurrence of exceptional gains from FX income, regulatorily induced fee reductions in the pensions business and a continued lull in the capital markets.”

However, when you look back 5 years ago, you sometimes wonder if these are mere excuses. In 2014, 5 FCMB’s profit after tax was N22.1 billion. It went down to N8.6 billion in 2017 and increased to N14.9 billion at the end of 2018. It will unlikely beat its 2018 performance, continuing with the inconsistency that has besieged its bottom line since 2014.

Even as a group, we see the same struggles with returns on average equity. While its commercial and retail banking group recorded an ROAE of 7.3%, the investment banking group (stockbrokers and capital markets) recorded 3.2%. Its best performing profit center is still its Wealth Management Group, which includes its Pension, Asset Management, and Trustees business, and it recorded an ROAE of 24.7%.

The bank’s foray into digital banking is perhaps the silver lining in what is fast becoming a familiar tell-tale of one of Nigeria’s banks facing stiff competition from FinTechs. Its digital banking transformation initiative has helped improve commission from mobile and USSD banking to average about N171.7 million monthly up 87% year on year. Digital loans have also increased to N219.3 million monthly. Digital customers are up 69% year on year to 4.1 million. These are all encouraging if you assume other banks don’t exist in this space, but we know better.

The last time we saw a tier 2 bank focus on retail, digital and mobile banking amidst high cost to income ratio and challenging NPL’s, it was acquired. The bank was also a family–led bank, leaning heavily on the legacy of its patriarch.

Despite some of the transformations currently being recorded in the bank, success and consistency seem to be eluding it. Its share price is down 29% in the last one year and still 48% down from its 2018 high of N3.51. If shareholders aren’t rewarded by capital appreciation, surely its intrinsic value should get some joy via consistently improving results.

As we approach 2020, much is expected from the bank in terms of performance. Its planned capital raise for 2020 may provide a buffer for its capital adequacy ratios but it means further pressure on return on average equity. This suggests shareholders may have to wait another year or maybe two before they start to see all the transformation plans start to bear fruit. Patience and interest in Nigerian stocks are at an all-time low, especially for banks with cyclical profitability ratios. Time is running out for FCMB.

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