FCMB Group to Acquire Percent of AIICO Pensions

FCMB bolsters 2019 earnings, says guidance prior to COVID-19 stands

FCMB Group raised 2019 performance as the group said it will meet the short term challenges of COVID-19 and declining global prices of oil with increased customer focus and innovation.

For 2020, the group recognised that downside pressures exist with transactions commissions, trade finance and a potential increase in impairment charges.

A number of analysts said they maintained a BUY rating on FCMB stock due to its strong fundamentals. Analysts’ position was also supported by strong earnings diversification. By consensus review, some equity analysts expressed satisfaction with lower exposure to the power and energy sector.

Meanwhile, FCMB is expected to release its first-quarter 2020 unaudited financial statement on April 30.

Estimates

FCMB maintains a 14% loan growth target for 2020. The Group Chief Executive Officer, Ladi Balogun, revealed that the guidance for 2020 prior to COVID-19 remains unchanged. While citing opportunities that exist, FCMB explained that top tier corporates looking to restructure, source working capital for COVID-19 related distributions and currency devaluation will create demand for loans.

In the outlook, the group expects Assets-Under-Management (AUM) to increase by more than 20%. The management said that the growth will be driven by organic and inorganic opportunities. In 2019, AUM grew by more than 28% to ₦403.1 billion as against ₦314.3 billion in the corresponding year in 2018.

Business interest

FCMB played strong in the oil and gas sector as 17.1% of its gross loans were credited to clients in this segment. It was observed that the FCMB group had no appetite for Power and Energy deals in 2019.

Also, the group audited financial statement shows that FCMB exposure to real estate and manufacturing sectors were 10.7% and 10.1% respectively. Though, it recorded 15.3% non-performing loans associated with gross loans from clients in the information and telecoms market.

In the real estate segment, it also recorded 7.9% NPL followed by 7.6% from individual clients that access credit from the bank. With more than 6% year to date loss in the stock market, analysts project that the earning season will be boring.

In 2019, FCMB strengthened its capital position as pointed by an increased capital adequacy ratio to 18.49% compared to 15% required by the Central Bank. This was the case despite the reported increase in the loans book. Management explained that its liquidity position retreated owing to 42.6% in the restricted funds. This had resulted in a cash reserve ratio of 31.2% in 2019.

Earnings performance

FCMB Group revved up earnings despite a harsh economic environment in 2019. The banking industry witnessed was blood hounded as the apex bank increased margin dilutive regulations. Amidst this, the financial service group raised revenue by 2.3% followed by a 4.4% increase in interest income.

The group struggle well at managing its cost structure. In 2018, FCMB expended ₦67 on every ₦100 revenue generated at the group level. However, 2019 came with a fairly better position. In the year, it expended ₦65.5 on every ₦100 income the group generated before considering overheads.

Analysts are of the view that the performance of financial services operators often reflects the state of the economic position at the time. Nigeria’s gross domestic size had jerked up at about 2.3% in 2019, following stable oil prices and productions volumes.

However, FCMB performance was affected by regulations, rivalry and constraints around funding. The Central Bank of Nigeria had raised Cash Reserve Ratio to 27.5% from the previous position by 500 basis points.

This, plus a 65% loans to deposit ratio target left a number of operators with a tighter financial position with just 7.5% to deal. Interest yielding assets returned to a total sum of ₦137.4 billion as against ₦131.2 billion in the comparable period in 2018.

But, FCMB’s cost of funds came in at 5.3%, thus resulted to increase in average growth in interest paid on funding sources. Interest payments grew more than 8%, from ₦59.1 billion to ₦64 billion at the end of the financial year 2019.

The banking sector performance in 2019 largely features a lower interest rate regime, followed by increased loan size but a thinner margin. Meanwhile, the drill in financial left net interest income of the group at ₦73.5 billion. This represents an uptick of 1.2% from ₦72.6 billion in the comparable year in 2018.

Non-interest income came a bit weak when compared with industry performance in 2019.

Asset quality

The non-performing loans ratio at the group level closed the year at 3.7% in 2019. This was 223 basis points lower than 5.9% recorded in 2018. Improvement in the bank’s assets quality in 2019 caused a 2.6% drop in impairment charges on credit losses booked by FCMB.

Investment and other income dropped by about 4% from ₦45.6 billion to ₦43.8 billion in 2019. The management was able to reduce overhead position despite the fact that the nation recorded 11.4% average inflation rate in 2019.

The group operating expenses was reduced by about 3% from ₦79.2 billion to ₦76.9 billion. Analysts explained that this supported the bottom line which would have otherwise come weaker. Wage and salaries that accounted for a significant chunk of the group operating expenses expanded.

Salaries and wages bills surged by 10.3% from ₦20.820 billion in 2018 to ₦22.970 billion a year after. FCMB reflated the bottom line by more than 9% while declined tax payment jerked up post-tax profit significantly.

The group report shows that profit for the year jerked up by 15.8% from ₦14.971 billion to ₦17.337 billion in 2019. The operating performance reflected positively on the balance sheet position. The group shareholders’ funds expanded to ₦200.666 billion.

This was about 9.4% above ₦183.427 billion. Total assets increased ₦1.668 trillion. This represents an increase of 16.6 when compared to ₦1.431 trillion in 2018. Cash and cash equivalent jerked up significantly in 2019. It moved from ₦185.147 billion to ₦223.454 billion.

A detailed look into the group financial statement shows that the cash includes current balances with banks within Nigeria and outside Nigeria at the end of 2019. This was apart from placement with local and foreign banks. Meanwhile, cash in foreign banks accounted for about 38% of the cash and cash equivalent in 2019.

FCMB restricted reserves ballooned. Restricted mandatory reserves deposit with the CBN increased to ₦156.834 billion from ₦121.386 billion in 2018. The group special cash requirement which is 5% special intervention reserve was flat at ₦25.11 billion between 2018 and 2019.

However, the bank explained in the financial statement that the loan to deposit ratio reserve of ₦26.971 billion. The amount represents restricted reserve for the failure of the banking subsidiary to meet the Loan to Deposit Ratio of 65% as of 31 December 2019.

Loans profile

FCMB grew loans book by 13.08% year on year. In 2018, the lender’s loan book had a carrying value of ₦633.034 billion. However, pushed by the need to meet the LDR target of 65%, the bank raised its total credit book to ₦715.88 billion in 2019.

On gross loans to customers which settled at ₦754.390 billion in 2019, the bank booked ₦38.51 billion as impairment allowance. This shows a better position when compared with ₦48.291 billion charges taken in 2018 when gross loans to customers was ₦681.332 billion.

The characteristic of the group loans book shows that corporate lending accounted for more than 76% of the impairment charge taken on gross loans in 2019. In 2018, impairment allowance on corporate lending was more than 82%. Then, gross loans came lower but credit charges was heavier.

Deposits

FCMB group failed to meet the 65% loans to deposits ratio target in 2019 despite the fact that it was able to grow deposits by 20%. Total deposits increased to ₦1.033 trillion in 2019 as against ₦860.9 billion recorded in 2018. Specifically, deposits from customers increased to ₦943.085 billion.

This represents an increase of 14.77% compare to ₦821.747 billion recorded in 2018. Meanwhile, the report shows that FCMB group customers’ base increased 27.5% to 7 million in 2019 from 5.5 million customers in 2018.

FCMB bolsters 2019 earnings, says guidance prior to COVID-19 stands

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