FCMB Reaffirms Plans to Grow Retail Business, Reduce Concentration
FCMB Group Plc has reaffirmed plans to grow its retail business and reduce income as well as deposits concentration, said its customers’ base expanded by 29% to 7.7 million.
However, the management said forty percent of its risk assets were restructured, and this represents about 29% of group risk assets as of June.
In its recent first half 2020 earnings call with analysts representing various investors, FCMB explained that Central Bank of Nigeria’s debits on the banking segment impacted the liquidity position.
FCMB said its effective cash reserve ratio settled at 54%, though liquidity ratio declined 11% to 32.2%, a 220 basis away from the CBN benchmark.
Speaking with analysts, the Group Chief Executive Ladi Balogun said: “This is probably the most significant movement that we saw where our cash reserve requirement actually doubled by ₦200 billion to ₦421 billion”.
“One thing we’re also trying is ensure that we diversify from just interest and banking income, and the key means of doing that has been through our investment management business”, the Group Chief said.
Discussing outlook for the rest of the year, FCMB said it expects regulatory risk to remain high.
Balogun said, “COVID-19 has been both positive and negative, but as the result showed on a net-net basis, we’ve been able to overcome the negatives and report a growing performance trend”.
In the first half, FCMB told analysts that Digital lending accounted for 22% of the lender’s retail loan sales, also that deposits have grown generally.
Balogun said lender has distributed about ₦48 billion of retail loan stream in the course of the year.
“In terms of innovation, we continue to see digital accounting for a significant and growing chunk of our transaction volumes and values.
“This served us particularly well during the lockdown period. We saw 9% quarter-on-quarter growth in terms of volume and 41% year-on-year growth.
“And this was in spite of six weeks of lockdown where many of our customers in the informal sector were not able to work”, Balogun stated.
However, the group Chief stated that FCMB did see revenue drop 20% year-on-year, largely because of the revised tariff guidelines from the central bank.
“Digital loans overall now account for about 22% of all our retail loan sales, that is both SME and personal banking.
“Our API platforms now have about 37 FinTechs signed up to them and other organizations connecting to us via this platform.
“And this is enabling us basically as a banking as a service to customers and also have enabled us to be able to distribute their products to our customers”, Balogun explained.
The Group Chief stated that the remote working practices that was deployed, as well as the reduction in travel expenses during this period has led to a 5% reduction quarter-on-quarter in terms of operating expenses.
“Some of that is due to the fact that customers are spending less and saving more at least for those that’s still earning an income.
“And we, therefore, were able to improve our current and savings accounts (CASA) mix, as well as bring down our interest expense as you see in our numbers”, he added.
Balogun said interest expense was also propelled downward by the Central Bank monetary policy environment, the cash reserve requirement, but are seeing fixed deposit rates remain in the very low single-digits.
He stressed that the dislocation and uncertainty in the markets have created some volatility, which FCMB’s Treasury section has been able to take advantage of.
“We’ve seen earnings being void in both trading and foreign exchange income”, Balogun explained.
On the asset management and brokerage side, Balogun said FCMB saw some significant growth in terms of earnings.
Speaking further, the Group Chief stated that lender’s API platforms now have about 37 FinTechs signed up to them and other organizations connecting via this platform.
“Our balance sheet in terms of total assets rose by 31%, largely driven by growth in deposits. Earnings rose by 26.5% to ₦11.1 billion.
“In terms of volumes, we saw strong deposit growth 35%. Loan growth also rose by 29% year-on-year, and our assets under management in the asset management business rose by 28% to ₦455 billion”, the Group Chief said.
Explaining further, Balogun told analysts that FCMB Group recorded faster growth in the non-pension side than in the pension side of the business.
“We’ve seen continued acceleration in terms of our customers, 29% growth in overall customers and 48% growth in our digital customers to ₦5.3 million.
“Earnings, we saw a slight improvement in return on equity (ROE) coming up to 9.4%, and stable NPL ratios at 3.5%”, he added.
Balogun maintained that the strategic themes for the group as a business, revolved around building resilience, particularly in our balance sheet, diversifying our earnings and generally reducing concentration, and continuing to drive our innovation agenda.
“In terms of resilience, we’ve seen the capital adequacy ratio has been at 17.3%, which are the group level, which is 6% up year-on-year despite the 29% loan growth”, he added.
He said that liquidity ratio did fall slightly by 11% quarter-on-quarter to 32.2%, but it’s important to stress that we saw over 100% growth in cash reserve requirements.
“I think that was about ₦200 billion plus growth, which if we normalize for that, then it’ll be a fact that liquidity also improved significantly”, he stated.
The group Chief said: “in terms of diversification of our business, one of the things that we’ve constantly have done is we need to grow the retail business and reduce concentration whether in terms of income or deposits”.
“In terms of retail banking, which is the key means of diversifying in the bank, we see that deposits account for 69% of total balance sheet in retail business.
“It was a mix bag, but all in all, we feel that the business was sufficiently diversified and has become substantially digitized to ensure that we were able to further calm the challenges of the most intense period of inactivity in the economy”, the management stated.
Kayode Adewuyi, FCMB Group Plc Chief Finance Officer said return on equity quarter-on-quarter and year-on-year, moving from 8.2% in the first half of last year to 9.4% in the same period for 2020.
The improved profitability, according to him, was supported by foreign exchange revaluation gain and improved net interest margin.
FCMB said its cost-to-income ratio improved in second quarter of 2020 partly because of the COVID lockdown.
However, non-performing loans to the total loans remains flat quarter-on-quarter, but improved year-on-year. This came on the back of write-downs of loans from the second half of 2019.
Profit before tax dropped 4% quarter on quarter and 26% year-on-year, respectively. But, operating expenses dropped in Q2 due to cost savings from the COVID lockdown, though cost grew year-on-year.
Speaking to the result, Nuru Adam, FCMB Chief Executive said, “Personal banking continues to contribute significantly accounting for about 45% of the group results”.
Adams explained the commercial banking arm of the group retail strategy continues to pay off positively.
The management said FCMB gross loan book of about ₦314 billion represents about 41% of the group total earnings assets in the period.
“We continue to see good growth in customer acquisition, low-cost deposit growth and the increased usage of our digital channels.
“We’ll continue to drive our various initiatives to encourage growth, optimize operating expenses and reduce cost of funds.
“Our SME business contributed 31% to net revenue. It was largely drive by growth in net interest income”, the Bank Chief explained.
He said: “We have seen a good growth and increase in the digital dollarization and processing in this segment.
“There was a 42.9% year-on-year growth in PBT, largely from net interest income, securities trading and foreign exchange income”.
Net interest income increased by 24.7% year-on-year, familiarizing from the gains from low-cost deposit growth.
However, we saw a decline of 4.6% quarter-on-quarter, largely attributable to decline in money market rates as well as COVID-induced forbearance on credit facilities as mentioned earlier.
Oluwatoyin Olaiya, FCMB Group Plc Chief Risk Office said: “We have continued with our focus to diversify the loan book and improve loan concentration across most sectors.
“We expect loan growth to continue and hedge through in line with our risk management criteria and plan for the year”.
In addition, James Ilori, FCMB Group Plc Investors Relation said assets under management rose in the first half of the year at ₦455 billion.
Ilori said the growth in assets under management (AUM) reflects the increasing effectiveness of our product sale strategy, which leverages the FCMB Group distribution strength, digital innovation.
“Our pensions business accounted for 75% of half-year ’20 AUM compared with 83% at the end of the first half of last year.
“The wealth management and collective investments schemes business lines contributed 53% of the ₦99 billion year-on-year growth in AUM”, Ilori explained.
FCMB Reaffirms Plans to Grow Retail Business, Reduce Concentration